THE (HIGH) OPPORTUNITY COST OF PAYING OFF YOUR MORTGAGE EARLY
There’s no shortage of ways to spend extra income.
Homeowners frequently toss it at their mortgage , which is terrific — for some.
For others, it can be psychologically comforting but mathematically backwards.
And while hindsight is 20/20, the last 12 months offer a vivid demonstration of how investing can outperform the rush to kill your mortgage early.
Weighing the options
The Canadian stock market is making a compelling case.
And when I say “stock market,” I’m referring to the performance of the S&P/TSX Total Return Index, one of the most followed indices in Canada that tracks dividends and price appreciation.
Rewind to about a year ago, when that index stood at 101,979 on Mar. 4, 2025, shortly after U.S. president Donald Trump decided his trade agreement with Canada needed a wrecking ball .
Back then, given the perceived risk to our economy, many investors didn’t want any part of Canadian equities. Twelve months later, that same index has surged more than 42 per cent.
Now, I’m not sure where you park your money, but opportunities for that kind of return don’t grow on trees.
Those who sat on the sidelines out of fear earned a rather expensive education in why timing the market is a losing hobby.
The mortgage relevance
Any Canadian blessed with discretionary dollars after each paycheque needs to put them somewhere.
Using the extra funds to accelerate mortgage payoff buys a certain peace of mind. And there’s nothing wrong with that — assuming they have no higher-rate debt and prepayments are the best choice for them.
But for those well-qualified homeowners with 10-plus-year investment horizons, other fallback assets and the discipline not to dump well-diversified stock holdings when markets get rough, funnelling spare cash into equities is a legitimate — often superior — alternative to prepaying the mortgage.
Since its inception on Jan. 1, 1977, the S&P/TSX total return index has had a compound annual growth rate of 10.66 per cent, including reinvested dividends, according to data from the London Stock Exchange Group (LSEG).
Canadian real estate has been the tortoise in the race, delivering roughly half that gross return.
Even after factoring in the principal residence capital gains exemption, the gap in resulting net worth over most long-term periods isn’t close.
To illustrate, consider two hypothetical people who got a $51,800 inheritance (which equals the approximate average home price on Jan. 1, 1977, according to the Canadian Real Estate Association).
Now suppose Person A bought a typical home with the money and Person B, blessed with nerves of steel, puts every dollar into equities.
Depending on one’s tax assumptions (this supposes a 33 per cent tax rate), the diligent stock investor (Person B) would be up roughly eight times more today.
Even if you back out the average rent that Person B would have paid, given they didn’t buy a home in 1977, their net worth would still be roughly seven times greater than Person A’s, who plunked all their money in a home.
Incidentally, if we add a Person C and assume they put 20 per cent down, got a $41,440 mortgage, and invested $41,440 in the market, they would have done just as well as Person B.
The point is that, on cold arithmetic alone and all else being equal, redirecting mortgage cash flow to prudent investments has historically been the winning move.
Wealthly Barber David Chilton is quick to note that there are numerous considerations besides hypothetical returns — things like marginal tax rates, estimated future stock market returns (which may or may not lag history in the next decade), risk, time value of money, time horizons, other debts, liquidity, investment diversification, discipline, the psychological benefits of a paid-off home, homeownership costs and more.
And a mortgage-free home undeniably has its perks. “If AI causes you to lose your job, no mortgage means you’ve lowered your burn rate,” Chilton says.
“That aside, home ownership, in general, is really expensive,” he adds. Apart from the mortgage, there are property taxes, insurance, maintenance, condo fees and so on.
Pay your mortgage slower and prosper?
“There is a misconception in people’s minds that shorter amortizations make them better off,” Chilton explains. For those who meet the suitability requirements, “If market returns stay at eight to ten per cent, then extending your amortization and investing more is a clear winner.”
And, naturally, hindsight shows that this is truer at some points in history than others.
“In 2020 and 2021, back when mortgage rates were under two per cent, you would have been crazy to pay off your mortgage quicker,” he said.
Conversely, there are periods throughout history when markets are overvalued, or rates are far above normal, and the gap between mortgage prepayments and investing is much different.
Ultimately, it’s just one big numbers game. And while we can’t guarantee which strategy will dominate, one can make educated assumptions and play the long-term odds.
Articles like this can’t tell you what’s best for you, but with any luck, this one nudges a few people toward a competent adviser who can run the math and set them on a winning course.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
This table reflects the prevailing rates at the time this story was published. For the best mortgage rates in Canada right now, click here .