Should You Pay Off Your Mortgage or Invest the Money?

Paying off a mortgage sooner versus investing that cash

You’re not alone, Chantal. Many households face limited dollars and several competing financial goals: reducing debt, growing investments, and saving for lifestyle purchases such as a second home. The most useful approach is to clarify priorities, model realistic outcomes, and weigh both financial and personal considerations before settling on a path.

First, think of mortgage repayment as a form of investment. Paying down mortgage principal produces interest savings, which is equivalent to earning a guaranteed, risk-free return equal to your mortgage interest rate. With interest rates higher now than in recent years, that guaranteed return has become more attractive for many borrowers.

Some people prefer to invest extra cash instead of accelerating mortgage payments because historically, stocks and bonds have delivered higher long-term returns than typical mortgage rates. Over the past few decades the five-year posted fixed mortgage rate has averaged about 6.4%. During roughly the same period Canadian equities returned about 8.7% annually and bonds about 5.5%, while U.S. stocks returned about 9.9% on average. These historical numbers show why some investors choose markets over debt repayment—but past performance is not a guarantee of future results, and the extra return usually carries more volatility and risk than the guaranteed savings from paying down debt.

With higher interest rates, the hurdle for investment returns to beat mortgage costs is steep. In practical terms, the decision often comes down to whether you value the certainty of reducing debt and lowering monthly obligations, or whether you can tolerate market risk in pursuit of potentially higher returns that would fund future goals like a second home.

Mortgage debt as an investment

If you decide to prioritize investing over paying down your mortgage, consider the tax implications of your mortgage interest. In some circumstances the interest on borrowed money used to earn investment income can be tax-deductible. If your mortgage interest is not currently tax-deductible, one strategy is to use non-registered investments to reduce mortgage principal and then borrow specifically to invest; that borrowing interest can sometimes be deductible when the borrowed funds are used to generate taxable investment income. That said, leveraging to invest increases risk and complexity, and it’s important to be cautious and seek professional tax and financial advice tailored to your situation.

Conversely, if your mortgage rate is a low fixed rate, accelerating principal paydown today only to borrow back later at a higher rate may not make financial sense. The tax benefit of deductible interest may not offset the higher borrowing costs if your mortgage rate has increased significantly.

Because you’ve earmarked your investments for a second home in a warmer climate, it’s worth considering buying that property sooner rather than investing in stocks and bonds with the intention of converting those holdings into a property purchase later. A vacation property is a tangible asset you can use and enjoy; it can also generate rental income when you’re not using it, which can help offset carrying costs. If you won’t personally use the property much in your 40s, renting it out short-term or long-term could make the purchase more financially sensible. Property managers can handle rentals for a fee—commonly 10–20% of rents depending on services—so factor that cost into your projections.

If the second home is located in the United States, remember there are cross-border tax rules: rental income typically must be reported on a U.S. tax return and on your Canadian return. Any U.S. tax paid can generally be claimed as a foreign tax credit on your Canadian tax return to prevent double taxation, but reporting obligations and filing requirements can be complex and may warrant professional tax guidance.

Whether U.S. real estate will outperform stocks or bonds over time is uncertain. Real estate offers benefits beyond pure return—use, enjoyment, and potential rental income—that may be valuable to you. Weigh both financial metrics (expected returns, tax treatment, carrying costs, and liquidity) and non-financial factors (lifestyle preferences, how often you’ll use the property, and your tolerance for being a landlord) before making a decision.

Some practical steps to move forward: set a clear priority for the next five years, run conservative scenarios comparing accelerated mortgage repayment versus continuing minimum mortgage payments while investing excess cash, and include the cost of buying and operating a second home (taxes, insurance, maintenance, and management fees) in your models. Consider meeting with a financial planner and a tax advisor to test scenarios tailored to your income, tax situation and long-term objectives.

Further reading on investing and paying off debt

• Contributing to an RRSP versus paying off a mortgage: trade-offs and timing
• Should you hold your mortgage inside retirement accounts: pros and cons
• Marriage or mortgage: personal decisions that affect financial priorities
• Renting versus owning: can you be financially secure without buying?
• Mortgage renewal and refinancing considerations and calculators