Is a TFSA better than paying down a mortgage?

Deciding whether to contribute to a TFSA or pay down your mortgage depends mainly on your mortgage rate, your expected investment return, and how much cash flexibility you want.

Simple rule of thumb

• Paying down your mortgage gives you a guaranteed, tax-free return equal to your mortgage interest rate.
• Putting money in a TFSA gives you a tax-free return that depends on what you invest in.

So, if your mortgage rate is higher than what you can reasonably earn after risk in a TFSA, paying down the mortgage often makes more sense. If your mortgage rate is low and you want liquidity or long-term growth, the TFSA may be the better choice.

When paying down the mortgage often wins

• Your mortgage rate is relatively high.
• You prefer a guaranteed return over market risk.
• You want to reduce fixed monthly obligations.
• You’re getting closer to retirement and want lower debt.

When the TFSA often wins

• Your mortgage rate is low.
• You may need access to the money later.
• You have a long time horizon and are investing for growth.
• You already have enough emergency savings.

Important caveat

If you’re in Canada, mortgage prepayment rules vary by lender and mortgage product. Some mortgages allow lump-sum prepayments or increased regular payments up to set limits, and going beyond those terms may affect fees or penalties. Check your specific mortgage contract before making large prepayments.