There is no shortage of ways to spend extra income.
Homeowners often throw it toward their mortgage, which is great for some.
For others, it may be psychologically reassuring but mathematically backwards.
And while hindsight is 20/20, the last 12 months clearly show how investing can beat the rush to cancel your mortgage early.
Weighing the options
The Canadian stock market makes a compelling argument.
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 indexes in Canada that tracks dividends and price appreciation.
Let’s go back to about a year ago, when this index was at 101,979 on March 4, 2025, shortly after US President Donald Trump decided his trade deal with Canada needed a wrecking ball.
At the time, many investors did not want to have a stake in Canadian stocks given the perceived risk to our economy. Twelve months later, the same index is up more than 42 percent.
Well, I’m not sure where you invest your money, but opportunities for such returns don’t grow on trees.
Those sitting on the sidelines out of fear got a pretty expensive education on why timing the market is a lost hobby.
The mortgage relevance
Every Canadian blessed with discretionary dollars after every paycheck needs to invest them somewhere.
Using the additional funds to speed up your mortgage repayment will provide you with some peace of mind. And there’s nothing wrong with that – assuming they don’t have any higher-interest debt and prepayments are the best choice for them.
But for well-qualified homeowners with an investment horizon of more than 10 years, other backup investments, and the discipline not to sell well-diversified stock holdings when markets get choppy, diverting excess cash into stocks is a legitimate — often better — alternative to paying off the mortgage early.
According to the London Stock Exchange Group (LSEG), the S&P/TSX Total Return Index has recorded a compound annual growth rate of 10.66 percent since its inception on January 1, 1977, including reinvested dividends.
Canadian real estate was the turtle in the race, providing about half of that gross return.
Even taking into account the tax exemption for capital gains from a primary residence, the gap in resulting net worth is not large over most long-term periods.
To illustrate, consider two hypothetical people who received an inheritance of $51,800 (which is the approximate average house price on January 1, 1977, according to the Canadian Real Estate Association).
Now let’s assume that Person A used the money to buy a typical house and Person B, blessed with nerves of steel, invests every dollar in stocks.
Depending on your own tax assumptions (this assumes a tax rate of 33 percent), the diligent stock investor (Person B) would be in the black by around eight times as much today.
Even if you factor out the average rent that Person B would have paid if they hadn’t bought a house in 1977, their net worth would still be about seven times greater than that of Person A, who put all his money into a house.
By the way, if we add Person C and assume he puts down 20 percent, takes out a $41,440 mortgage, and invests $41,440 in the market, he would have done just as well as Person B.
The point is that redirecting mortgage cash flow to prudent investments has historically been the key move, all things being equal, all things being equal.
Wealthy barber David Chilton is quick to point out that there are numerous other considerations beyond 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 debt, liquidity, investment diversification, discipline, the psychological benefits of a paid-off house, homeownership costs, and more.
And a home without a mortgage has undeniable advantages. “If AI causes you to lose your job, no mortgage means you’ve lowered your burn rate,” says Chilton.
“That being said, homeownership is generally very expensive,” he adds. In addition to the mortgage, there are property taxes, insurance, maintenance, condominium fees, etc.
Pay off your mortgage more slowly and be successful?
“There’s a misconception in people’s minds that shorter paybacks make them better off,” explains Chilton. For those who meet the eligibility requirements: “If the market return remains at eight to ten percent, extending the payback and investing more is a clear winner.”
And of course, hindsight shows that this is more true at some points in the story than others.
“In 2020 and 2021, when mortgage rates were below two percent, it would have been crazy to pay off the mortgage faster,” he said.
Conversely, there are periods throughout history when markets are overvalued or interest rates are far above normal, and the gap between mortgage prepayments and investments is quite different.
Ultimately, it’s just a single game with big numbers. And while we can’t guarantee which strategy will prevail, one can make educated guesses and weigh the long-term opportunities.
Articles like this can’t tell you what’s best for you, but with any luck this article will get a few people to contact a knowledgeable advisor who can do the math and get them on the right path.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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