Should Retirees Pay Off Their Mortgage With Investments?

Ask MoneySense

I retired this year and my mortgage is coming due soon. My advisor said to keep the mortgage as rates are as low as possible and keep the money invested to keep making me money. I’m not sure this is wise, and my advisor works for the bank that holds my mortgage. What do you think?

– Liz

Is it a good idea to pay off a mortgage with RRSPs?

Ideally, people enter retirement with little or no mortgage debt. In practice, many retirees still carry mortgages for a variety of reasons: market timing, life events, or simply not having had the means to pay the balance down before retiring. If you’re weighing whether to cash in investments—especially RRSPs—to eliminate a mortgage, the decision depends on several factors: the type of account holding the investments, tax consequences, your tolerance for risk, and your broader retirement cash flow needs.

Comparing investment returns to mortgage interest

The first step is to compare the guaranteed cost of your mortgage—its interest rate—to the realistic after-tax returns you expect from your investments. If the account you would use to pay the mortgage is an RRSP, withdrawals are fully taxable as income. A large lump-sum RRSP withdrawal can push you into a higher tax bracket and significantly reduce the amount available to pay down the mortgage after taxes. That can make an all-at-once RRSP liquidation an inefficient way to eliminate mortgage debt.

In many cases, a phased approach—taking RRSP withdrawals over multiple years to top up retirement income while gradually reducing debt—can reduce your overall tax hit and still lower interest costs. Carrying some mortgage into retirement may be acceptable if it preserves a larger after-tax nest egg and if the mortgage rate is relatively low.

If the funds are in a TFSA, the calculation is simpler: TFSA withdrawals are tax-free. Paying off a mortgage with TFSA savings is equivalent to buying a guaranteed after-tax return equal to your mortgage rate. If your mortgage rate is 5% and you expect lower, more volatile returns from your TFSA investments, paying off the mortgage can be an attractive, low-risk choice.

For non-registered (taxable) investment accounts, you must factor in capital gains tax and investment income taxes on sale. Even after taxes, selling some or all of a non-registered portfolio to pay a mortgage can make sense, particularly if your portfolio is not expected to outpace the mortgage rate net of taxes and fees.

Borrowing to invest and other strategies

Another strategy sometimes suggested is to pay the mortgage using invested assets and then borrow back the equivalent amount to re-invest, making the interest on the new loan tax-deductible if it is legitimately used to earn income. That can be a complex move and creates new risks—especially in retirement, when you likely prefer stability over leverage. Borrowing to invest increases volatility and can magnify losses, and I generally caution retirees against taking on investment leverage unless they fully understand the risks and have a strong tolerance for market swings.

If you pursue this route, ensure the borrowing is structured properly and that you are comfortable with the added complexity and potential tax implications. It’s not a decision to make lightly.

Non-registered versus registered accounts: key tax considerations

When you liquidate non-registered investments, only a portion of the gain is taxable (capital gains), and the tax rate on capital gains is generally lower than full income tax on RRSP withdrawals. That often makes selling non-registered holdings to pay a mortgage more attractive than withdrawing from an RRSP. If the taxable amount is modest relative to the mortgage reduction you achieve, getting debt-free may be preferable for peace of mind and cash-flow simplicity.

By contrast, RRSP cashouts are taxed as ordinary income. That can dramatically reduce the net amount you receive, especially if a lump-sum withdrawal pushes you into a higher tax bracket. For many retirees, RRSP funds are better kept invested and converted gradually into retirement income (for example, by transferring to a RRIF and scheduling withdrawals) rather than used as a single loan payoff.

Conflicts of interest and adviser recommendations

It’s reasonable to be cautious if your advisor works for the bank holding your mortgage. Institutional incentives can sometimes bias advice toward keeping assets invested with the bank or renewing mortgages with attractive internal terms. Ask for a clear, written explanation of why your advisor recommends keeping the mortgage, including return assumptions, tax projections, and a comparison of scenarios (pay off mortgage now, pay off partially, or keep invested). Request a second opinion if you’re unsure.

What to do about an outstanding mortgage

In summary, the most appropriate choice depends on your risk tolerance, the account type holding your investments, and the tax consequences of liquidation:

If your investments are non-registered, paying down the mortgage often makes sense because the post-tax return required to beat the mortgage rate is relatively high.
If your funds are in a TFSA, paying off the mortgage gives you a guaranteed, tax-free return equal to your mortgage rate—often an attractive, low-risk option.
If your funds are in an RRSP, be cautious: large withdrawals are taxed as income and may be inefficient. Consider staged withdrawals or converting to retirement income vehicles before deciding to pay the mortgage entirely from RRSP funds.

Consider your cash-flow needs, emergency savings, and overall retirement plan. If you value certainty and lower ongoing expenses, paying down or eliminating mortgage debt can reduce monthly obligations and stress. If you are comfortable taking investment risk, have a well-diversified portfolio, and expect returns comfortably above your mortgage rate after taxes and fees, staying invested may be reasonable.

Finally, take any single advisor’s recommendation with healthy skepticism—especially if that advisor has incentives tied to keeping assets invested or renewing loans. Seek a second opinion or a fee-only planner who has no sales incentives and can model the tax and return scenarios specific to your situation.