The first two articles in this series compared mortgage prepayment with investing inside a TFSA and an RRSP. The TFSA comparison was relatively clean because both sides could be considered largely on an after-tax basis: paying down a non-deductible mortgage avoids an after-tax borrowing cost, while investment growth inside a TFSA is generally tax-free. The RRSP complicated the comparison because the contribution can generate a valuable tax deduction today while withdrawals become taxable income later.
Non-registered investing creates a third version of the same decision, and in some ways it is the hardest one.
Suppose I have another $25,000 available. I could make a lump-sum mortgage payment or put the money into a regular investment account. There is no RRSP deduction when I make the investment, and there is no TFSA shelter around the returns. Interest, dividends and realized capital gains can all create tax, although they are taxed differently. Unrealized capital gains can defer tax for years. Capital losses can eventually offset capital gains. The mix of investments matters, the amount of portfolio turnover matters, and my marginal tax rate matters.
That immediately makes the familiar comparison of “5% mortgage versus 8% stock-market return” incomplete.
The 5% mortgage is approximately an after-tax cost. The 8% investment return is a pre-tax expectation. If part of that 8% disappears to tax before I can reinvest it, I am not really choosing between 5% and 8%. I am choosing between a relatively certain after-tax benefit from eliminating mortgage interest and whatever portion of an uncertain investment return ultimately survives taxation.
That does not automatically make the mortgage the better choice. A tax-efficient equity portfolio held for decades can still have a substantial expected advantage over a relatively cheap mortgage. But once the registered accounts are removed from the equation, the investment has a higher hurdle to clear.
The Mortgage Is an After-Tax Hurdle
Start with the mortgage.
For an ordinary Canadian principal residence, mortgage interest is generally a personal expense rather than a deductible investment expense. If I use $25,000 to reduce a mortgage costing roughly 5%, I stop paying mortgage interest on that $25,000. I do not report the avoided interest as income and then pay tax on it. It simply disappears as an expense.
That makes mortgage prepayment economically similar to earning a relatively certain after-tax return equal to the borrowing cost being avoided. It is not literally an investment producing a 5% return; I have reduced a liability rather than purchased an asset. But for capital-allocation purposes, the comparison is useful.
Using the same convention as the previous mortgage articles, Canadian fixed mortgage rates are commonly quoted with semi-annual compounding. A quoted 5% mortgage therefore has an effective annual cost of about 5.06%. I am going to continue calling it a 5% mortgage conversationally, while using the proper compounding convention in the mortgage calculations.
That after-tax hurdle matters much more once the competing investment is taxable.
If I can earn 5% in a taxable GIC while carrying a 5% mortgage, I have not created a financial tie. If the GIC interest is fully taxable at my marginal rate, I keep considerably less than 5%. The mortgage saving remains approximately 5%.
The comparison has to be made after tax.
Interest Income Shows the Problem Most Clearly
Suppose I have a 5% mortgage and can earn 5% in a taxable interest-bearing investment. If my marginal tax rate on that interest is 40%, my simplified after-tax return is:
5% × (1 – 40%) = 3%
I am deliberately carrying a roughly 5% non-deductible liability in order to own an asset producing approximately 3% after tax. There may still be a liquidity reason for doing that, but there is no investment-return argument for it.
The more useful calculation is to ask what fully taxable interest rate would be required simply to match the mortgage:
Required pre-tax return = mortgage rate ÷ (1 – marginal tax rate)
At a 40% marginal rate, a 5% mortgage requires approximately:
5% ÷ 60% = 8.33%
At a 50% marginal rate, the same mortgage requires a fully taxable return of approximately:
5% ÷ 50% = 10%
That produces a useful illustration of how quickly the taxable hurdle rises.
| Mortgage Rate | 30% Tax Rate | 40% Tax Rate | 50% Tax Rate |
|---|---|---|---|
| 3% | 4.29% | 5.00% | 6.00% |
| 4% | 5.71% | 6.67% | 8.00% |
| 5% | 7.14% | 8.33% | 10.00% |
| 6% | 8.57% | 10.00% | 12.00% |
| 7% | 10.00% | 11.67% | 14.00% |
These are not expected stock-market returns. They are the pre-tax returns required from an investment whose return is fully taxable as ordinary income merely to equal the mortgage.
That distinction matters. At a 3% mortgage, holding some taxable fixed income can still be perfectly reasonable, particularly when liquidity is important. At a 6% or 7% mortgage, the required fully taxable return becomes extremely high for someone in a high marginal bracket. In that situation, paying down the mortgage becomes a formidable competitor to GICs, bonds and other interest-heavy investments.
Equities are different because their returns do not normally arrive entirely as taxable interest.
An 8% Equity Return Is Not One Kind of Income
Suppose two portfolios both produce an 8% total return. One generates most of that return through taxable distributions. The other generates a relatively small dividend yield and most of its return through long-term capital appreciation that remains unrealized for years.
They may have the same pre-tax return and very different after-tax outcomes.
Interest income is generally included in taxable income and taxed at the investor’s applicable marginal rate. Dividends from taxable Canadian corporations receive different treatment through the dividend gross-up and federal dividend tax credit. Foreign dividends generally do not receive the Canadian dividend tax credit. Capital gains are different again because only part of the gain is included in taxable income, and tax generally does not arise simply because an investment has increased in market value. The gain normally has to be realized.
This is why I do not think there is a responsible single answer to the question, “What is an 8% stock-market return after tax?”
It depends.
A low-turnover portfolio that generates relatively modest distributions and allows capital gains to compound unrealized for decades can be quite tax-efficient. A portfolio producing large taxable distributions or constantly realizing gains can experience much greater tax drag. Two investors holding the same portfolio can also have different results because their provinces and marginal tax rates are different.
Rather than pretending there is one correct after-tax equity return, I think it is more useful to understand what the tax drag does to compounding.
Capital Gains Make Taxable Equities More Competitive
Capital gains are particularly important because their taxation is both preferential relative to ordinary interest income and potentially deferred.
As of this writing, one-half of a capital gain is generally included in taxable income. The federal government had proposed increasing the inclusion rate for certain gains, but that proposed increase was ultimately cancelled. Finance Canada confirmed in its 2026 Federal Tax Expenditures report that the government would not proceed with the proposed increase. For the purpose of this article, I am therefore using the current 50% inclusion rate.
Suppose I realize a $10,000 capital gain and my marginal tax rate on the resulting taxable income is 40%. With a 50% inclusion rate, the simplified calculation is:
$10,000 × 50% × 40% = $2,000
The effective tax in that simplified example is therefore 20% of the full capital gain, not 40%.
The timing may be even more important. If the $10,000 gain remains unrealized, I generally have not triggered that capital-gains tax simply because the investment increased in value. The entire unrealized amount can remain invested and continue compounding.
That is not tax-free compounding. A future tax liability still exists. But it is tax-deferred compounding, and deferring tax for ten, twenty or thirty years can have substantial value.
This is why a tax-efficient equity portfolio can compete much more effectively against a mortgage than a GIC producing the same headline return. The gross return is only part of the story. The character and timing of the return matter too.
What Tax Drag Does Over Twenty Years
Take the same $25,000 starting point used throughout this series.
If it compounds for twenty years at the following rates, the ending values are:
| Annual Compound Return | Value After 20 Years |
|---|---|
| 5% | $66,332 |
| 6% | $80,178 |
| 6.5% | $88,091 |
| 7% | $96,742 |
| 7.5% | $106,196 |
| 8% | $116,524 |
Now compare those numbers with the economic value of using the $25,000 to reduce mortgages at different quoted rates:
| Mortgage Rate | Economic Value After 20 Years |
|---|---|
| 3% | $45,350 |
| 4% | $55,201 |
| 5% | $67,127 |
| 6% | $81,551 |
| 7% | $98,981 |
The important observation is not that a 5% mortgage approximately equals a 5% after-tax investment return. That is almost tautological. The useful point is what happens when an 8% expected pre-tax investment return becomes something lower after taxation.
At 8%, the $25,000 reaches about $116,500 after twenty years. Reduce the effective compound return by only half a percentage point to 7.5%, and the ending value falls to about $106,200. At 7%, it is about $96,700. At 6.5%, about $88,100. At 6%, about $80,200.
Moving from 8% to 7% therefore reduces the ending value by almost $20,000. Moving from 8% to 6% reduces it by more than $36,000.
I am not saying tax will necessarily reduce an 8% equity return to 6% or 7%. That would depend on the portfolio and investor, and imposing one number would create false precision. The point is that apparently modest annual tax drag compounds just as surely as investment returns do.
Inside a TFSA, I could reasonably compare the mortgage with the full investment return. In a taxable account, I have to care about how much of that return survives.
The Comparison Changes With the Type of Portfolio
This produces some fairly different answers depending on what I actually intend to own.
If the alternative to mortgage prepayment is a taxable GIC or bond portfolio producing fully taxable interest, I would become interested in paying down the mortgage at relatively modest mortgage rates. A 5% non-deductible mortgage is extremely difficult for a 5% taxable GIC to compete with when the investor is in a high marginal bracket.
If the alternative is a diversified, low-turnover equity portfolio with a long holding period, I am much less willing to automatically favour mortgage prepayment. Capital gains can remain deferred, only part of realized capital gains is included in taxable income under current rules, and Canadian dividends have their own tax treatment. The portfolio still suffers tax drag compared with a TFSA, but not necessarily enough to eliminate the expected advantage of equities over relatively cheap debt.
That distinction is more useful to me than a universal rule about “investing versus the mortgage.” The account type matters, but so does what is inside the account.
A 3% Mortgage Is Still Cheap Capital
Consider a homeowner with a 3% mortgage, a long investment horizon, adequate liquidity and registered accounts that are already being used effectively. If the alternative is a diversified equity portfolio intended to remain invested for twenty or thirty years, I would generally favour investing.
The mortgage offers certainty, but the hurdle is low. Under our simplified twenty-year model, using $25,000 to eliminate a 3% mortgage cost creates an economic value of about $45,350. The same $25,000 compounding at 7% reaches approximately $96,700; at 8%, approximately $116,500.
Tax will reduce the value of the non-registered investment relative to a TFSA, but there is an enormous gap to work with. A tax-efficient portfolio does not have to deliver the full 8% after tax to make investing attractive against a 3% mortgage.
There are still reasons to choose the mortgage. Someone close to retirement may value lower fixed expenses more than terminal wealth, and someone who simply dislikes leverage may rationally accept a lower expected return for certainty. But I would be reluctant to spend decades directing all available capital toward eliminating very cheap mortgage debt while building relatively little in diversified financial assets.
At 5%, the Decision Becomes Much More Interesting
Now move the mortgage to 5%.
A $25,000 prepayment has an economic value of approximately $67,100 after twenty years under our model. An 8% investment reaches roughly $116,500 before considering tax. On the surface, the investment has an enormous advantage, but unlike the TFSA version of this comparison, I do not get to keep the entire 8% return without friction.
If the portfolio is tax-efficient, turnover is low, distributions are modest and most gains are allowed to remain unrealized for a long period, taxable equity investing can still have a meaningful expected advantage. If the portfolio throws off significant taxable income every year or repeatedly realizes gains, that advantage narrows.
This is where I would stop relying on a headline expected return and start looking at the actual portfolio. I would also ask how large an expected after-tax advantage I require before accepting equity risk instead of taking a relatively certain 5% mortgage saving.
That was already important in the TFSA comparison. It is more important here because taxation consumes part of the investment risk premium.
An expected 8% pre-tax return against a 5% mortgage can still be quite attractive. An expected 6% or 6.5% after-tax outcome against the same mortgage is much less compelling. I am taking market risk, accepting the possibility of long periods of poor returns, and dealing with taxation for what may ultimately be a fairly modest premium over a guaranteed reduction in debt.
At roughly 5%, I consider the choice genuinely household-specific rather than obvious.
At 7%, I Would Need a Strong Investment Case
Now consider a 7% mortgage.
Using $25,000 to reduce it creates an economic value of approximately $99,000 after twenty years under the same model. A portfolio compounding at 8% reaches about $116,500 before considering tax.
The gross spread is only one percentage point.
Once the taxable nature of the portfolio is included, I find it very difficult to justify taking equity-market risk merely because the expected gross return is slightly higher than the mortgage rate. The portfolio could outperform substantially, but that is not the relevant test. It could also experience a major drawdown or a long period of disappointing returns.
Paying down a 7% non-deductible mortgage offers something economically close to a guaranteed 7% after-tax benefit. That is an unusually strong low-risk use of capital.
There could still be reasons to invest. Perhaps the household is overwhelmingly concentrated in home equity and desperately needs diversified financial assets. Perhaps liquidity is unusually valuable. Perhaps the investor has a very long horizon and an unusually high tolerance for risk.
But I would want a substantive reason beyond “stocks average more than 7%.”
The investment has to compensate me for both taxation and uncertainty.
A 6.5% Mortgage Shows How Narrow the Spread Can Become
The same point is visible at 6.5%.
A $25,000 mortgage prepayment grows to an economic value of about $89,900 after twenty years and roughly $123,700 after twenty-five years using the mortgage convention in this series.
The same $25,000 compounding at an assumed 8% reaches about $116,500 after twenty years and $171,200 after twenty-five.
The gross expected investment advantage is therefore about $26,700 after twenty years and $47,500 after twenty-five.
Those are meaningful amounts, but remember that the 8% investment number is still before the tax consequences of a non-registered portfolio. The 6.5% mortgage saving requires no such adjustment.
That makes this a much closer call than the same 8% equity assumption against a 3% mortgage. The long horizon still gives equities room to outperform, particularly if the portfolio is tax-efficient, but the mortgage is now offering a very high guaranteed hurdle.
This is exactly why I do not think “stocks return 8%, therefore invest” is enough.
Registered Accounts Should Usually Be Considered First
There is also an obvious sequencing question.
If I have $25,000 of unused TFSA room and am considering putting $25,000 into a taxable brokerage account, I should have a reason.
The TFSA allows investment growth to compound without Canadian tax and generally allows tax-free withdrawals. If the exact same investment can be held there instead of in a taxable account, voluntarily accepting tax drag usually requires some other planning consideration.
RRSP room is more complicated because the value of the deduction depends on current and future tax rates, but it also deserves consideration before defaulting to a taxable account.
For many households, therefore, the actual sequence is not simply:
Mortgage or non-registered investing?
It is:
Mortgage, TFSA, RRSP or non-registered investing?
The taxable account often becomes the marginal destination for additional investment capital after the more valuable registered opportunities have already been considered.
That is what makes this article the logical third comparison in the series. Once the registered shelters are substantially used, the mortgage hurdle becomes much harder for additional investments to clear.
Non-Registered Investing Still Has a Major Advantage: Liquidity
Taxable investing loses badly to registered investing on tax shelter, but it has one characteristic I value considerably: flexibility.
There is no annual contribution ceiling. I can invest $10,000 or $500,000 if I have the capital. There is no RRSP-style tax consequence simply because money leaves the account. Selling an investment may create a capital gain or loss, but the entire withdrawal is not automatically taxable income.
Mortgage prepayment does almost the opposite. It moves liquid capital into home equity.
Home equity is real wealth, but it is not cash. Accessing it later may require a HELOC, refinancing or selling the property. All of those depend on circumstances that can change. Credit can be repriced, underwriting standards can change, and borrowing capacity can disappear at precisely the moment I need liquidity most.
That does not mean a stock portfolio should serve as an emergency fund. Equities can fall sharply when the economy is weak, which may be exactly when employment income becomes less secure. But a diversified taxable portfolio remains a fundamentally more accessible financial asset than another $25,000 buried in the house.
Liquidity therefore has to be valued separately from expected return.
If the $25,000 represents nearly all the accessible capital a household has, I would be reluctant to put all of it against the mortgage even if the mortgage wins the mathematical comparison. The first job may be to maintain adequate liquidity. Only the capital genuinely available for long-term use should be forced into the mortgage-versus-investing decision.
Home-Equity Concentration Matters Here Too
The rest of the household balance sheet can completely change my answer.
Suppose I own an $800,000 house with significant equity but have relatively little invested outside registered retirement accounts. Another $25,000 mortgage prepayment strengthens the balance sheet by reducing debt, but it also pushes another $25,000 into an asset that already dominates my net worth.
That is the concentration problem I explored in more depth in House Rich in Canada: The Hidden Risks of Concentration.
A diversified investment portfolio does something different. It creates ownership of productive assets outside the house, potentially across countries, currencies and industries, while remaining more liquid.
That diversification has value even if the portfolio’s expected after-tax return is not dramatically higher than the mortgage hurdle.
Reverse the circumstances and I may reach the opposite conclusion. Someone with a $1.5 million investment portfolio and a $300,000 mortgage may gain relatively little diversification from another $25,000 of equities. Reducing a 5.5% or 6% mortgage may improve the household balance sheet more meaningfully by reducing leverage and future fixed expenses.
The next dollar does not exist in isolation. Whether it should become home equity or financial assets depends partly on how much of each the household already owns.
Capital Losses Give the Taxable Account Some Flexibility
Taxable accounts also have one feature that TFSAs and RRSPs do not provide in the same way: realized capital losses can have tax value.
If I sell a capital investment for less than its adjusted cost base, a capital loss can generally offset taxable capital gains subject to the applicable rules. According to the CRA Capital Gains Guide, net capital losses can generally be carried back three years or carried forward indefinitely.
That can make tax-loss harvesting useful in a taxable portfolio. If one investment has declined while another has appreciated, I may be able to realize the loss, reposition the portfolio and use the loss against taxable gains.
This is not free money. The superficial-loss rules can deny an immediate loss if I or certain affiliated persons reacquire the same or identical property within the relevant period, and selling purely for tax reasons can produce poor investment decisions. But losses are not economically irrelevant just because the portfolio is taxable.
Mortgage prepayment has no comparable feature because it does not need one. The return from eliminating mortgage interest does not suffer market losses in the first place.
Dividends Add Another Layer
Dividends make the idea of a universal “taxable portfolio return” even less useful.
Dividends from taxable Canadian corporations can qualify for the dividend tax credit, while foreign dividends do not receive that same Canadian credit. Eligible and non-eligible Canadian dividends also receive different tax treatment.
The effective tax cost therefore depends on what I own and where the distributions originate.
I do not think a mortgage-versus-investing article needs to become an asset-location textbook, but the lesson is important: once a taxable portfolio becomes substantial, where assets are held can matter almost as much as what assets are held.
Interest-heavy assets may benefit disproportionately from tax shelter. Investments expected to generate much of their return through deferred capital appreciation can be more tax-efficient in a non-registered account. Foreign withholding taxes, rebalancing needs and personal tax rates complicate the answer further.
The larger point is simply that a well-structured taxable portfolio has a better chance of clearing the mortgage hurdle than a poorly structured one.
Retirement Changes the Objective
As retirement gets closer, I become increasingly sympathetic to mortgage reduction.
That was true in the TFSA comparison and in the RRSP comparison, and it remains true here. The reason is not that investments stop being attractive at sixty. It is that the objective begins to shift from maximizing a distant terminal value toward creating reliable after-tax cash flow and reducing the amount the portfolio is required to produce.
A mortgage creates a fixed monthly obligation. Eliminating it reduces the amount of cash a household needs every year. That can be particularly valuable when markets decline early in retirement, because fewer fixed expenses mean less pressure to sell investments into a falling market.
A taxable portfolio still has substantial retirement value, however. Unlike an RRSP withdrawal, selling $20,000 of non-registered investments does not necessarily create $20,000 of taxable income. Part of the proceeds may simply be the return of adjusted cost base, while only the gain portion receives capital-gains treatment.
That can provide useful control over taxable retirement income.
For that reason, I would not automatically liquidate a diversified taxable portfolio simply to enter retirement mortgage-free. A household with meaningful TFSA, RRSP/RRIF and non-registered assets can have considerably more tax and cash-flow flexibility than one whose wealth is overwhelmingly concentrated in home equity and registered retirement assets.
The question remains one of balance rather than purity.
Borrowing to Invest Changes the Calculation
There is one important Canadian wrinkle that eventually appears in any serious discussion of mortgage debt and non-registered investing: interest deductibility.
So far, I have assumed that I already have $25,000 of cash and am choosing between reducing a personal mortgage or investing that cash. Under those circumstances, continuing to carry the mortgage does not suddenly make the mortgage interest deductible just because I also own investments.
The use of the borrowed money matters.
When borrowed money can be directly traced to an eligible income-earning use and the other tax requirements are satisfied, the interest may be deductible. The CRA sets out those requirements in its Income Tax Folio on interest deductibility.
That creates the foundation for leveraged-investing and mortgage-conversion strategies such as the Smith Manoeuvre.
Suppose I have a $300,000 personal mortgage and $25,000 cash. If I simply invest the $25,000, I still have a $300,000 personal mortgage whose interest remains non-deductible.
Alternatively, I might pay $25,000 against the mortgage and then borrow $25,000 through a separate investment facility to purchase qualifying investments. I once again have $300,000 of total debt and $25,000 invested, but $25,000 of the borrowing may now have a different tax character because its use can be traced directly to an eligible investment purpose.
That distinction is the heart of the Smith Manoeuvre. It does not make the existing personal mortgage interest deductible by declaration. It attempts to progressively replace non-deductible personal borrowing with investment borrowing that may generate deductible interest when the tax requirements are satisfied.
If a 5% investment borrowing cost were fully deductible to someone whose relevant marginal tax rate is 40%, the simplified after-tax cost would be:
5% × (1 – 40%) = 3%
That changes the investment hurdle substantially.
It also changes the risk.
The debt still exists. The investment can fall. Interest rates can rise. The borrowed funds have to remain traceable to eligible uses, and the CRA’s income-earning-purpose requirement matters. A reasonable expectation of capital gains by itself is not sufficient for the interest-deductibility test.
This is why I would treat the Smith Manoeuvre as a separate leveraged-investing decision rather than as a clever footnote that automatically makes investing superior to mortgage prepayment.
A tax deduction makes an expense cheaper. It does not make the expense disappear.
Mortgage Prepayment Wins on Simplicity
After discussing adjusted cost bases, tax drag, dividend credits, capital losses and investment-interest deductibility, the appeal of the mortgage side becomes obvious.
I owe $300,000. I pay $25,000. I now owe $275,000.
Subject to the mortgage contract’s prepayment rules, I have eliminated the future interest on that principal. There are no investment returns to forecast, distributions to tax, adjusted cost bases to track or future capital gains to realize.
That simplicity should not be confused with unsophisticated financial planning.
Paying down a 6% non-deductible mortgage is a very strong low-risk use of capital. I do not need to chase every theoretical extra percentage point available from markets simply because an expected-return model says it might be possible.
The investment alternative should offer enough expected after-tax upside, diversification or liquidity to justify the additional uncertainty.
At the same time, simplicity is not automatically optimal. Someone with a 2.5% mortgage, thirty years until retirement, adequate liquidity and relatively little wealth outside the house can become too conservative by aggressively eliminating cheap debt while neglecting financial assets. A paid-off house provides security, but it does not produce liquid capital without being sold or borrowed against.
The objective is not to eliminate debt at any cost. It is to build the strongest overall balance sheet.
How I Would Think About the Decision
I would begin with registered accounts. If substantial TFSA room remains, I would normally compare mortgage prepayment with TFSA investing before deliberately accepting taxable investment returns. If RRSP room remains, I would consider whether the current deduction is valuable enough to use now.
Once those decisions have been made, I would look at the mortgage rate and the actual investment I am considering.
At a mortgage rate around 3%, I would be reluctant to aggressively prepay at the expense of long-term diversified equities if the household already has sufficient liquidity. A tax-efficient equity portfolio has a substantial expected-return cushion over that hurdle.
At 4% to 5%, the decision becomes much more sensitive to tax rate, portfolio construction, time horizon and the rest of the balance sheet. I would not assume the mortgage wins, but I would want to know what portion of the expected investment return is likely to survive tax.
At roughly 6%, mortgage prepayment becomes a very serious competitor to non-registered investing. The investment can still win, particularly over a long horizon, but the expected after-tax spread needs to justify market risk.
At 7%, I would need a strong reason not to take the mortgage return. An uncertain 8% pre-tax equity return is not especially attractive to me when the alternative is avoiding a relatively certain 7% non-deductible borrowing cost.
Those are not rules. A household that is overwhelmingly house-rich may reasonably invest even when the expected advantage is modest because diversification and liquidity matter. Someone with a large securities portfolio may reasonably choose mortgage reduction at a lower rate because another $25,000 of equities changes very little while reduced leverage improves the balance sheet.
The useful threshold is therefore not simply a mortgage rate.
It is the expected after-tax investment premium over the mortgage, considered alongside risk, time, liquidity and household concentration.
Once the Tax Shelters Are Full, the Mortgage Gets Harder to Beat
That is ultimately what distinguishes this comparison from the previous two.
The TFSA gives the investment a significant structural advantage: investment growth is generally tax-free.
The RRSP gives the investor a different advantage: a potentially valuable tax deduction today and tax-deferred compounding, with taxable withdrawals later.
The non-registered account gives me neither. I invest after-tax dollars and then deal with taxation as the portfolio generates income and realizes gains.
That does not make non-registered investing unattractive. For someone who has filled the registered accounts, accumulating a large taxable portfolio may be exactly what building wealth requires. A diversified, tax-efficient equity portfolio held over decades can plausibly produce much more wealth than aggressively eliminating a low-rate mortgage, while also giving the household liquid assets outside the house.
But the investment now has to work harder.
A 5% mortgage is not really competing with an 8% taxable investment. It is competing with whatever uncertain after-tax return ultimately remains from that expected 8%.
As the mortgage rate rises, that distinction becomes increasingly important. At 6% or 7%, eliminating non-deductible mortgage interest can be one of the strongest low-risk uses of capital available to a Canadian homeowner. At 2% or 3%, decades of diversified equity ownership may present a much larger opportunity.
Between those extremes, I would stop asking whether the investment return is technically expected to exceed the mortgage rate.
I would ask how much I expect to keep after tax, how much additional return I am being offered for accepting market risk, whether I need more liquidity or more debt reduction, and whether another $25,000 is improving the diversification of my overall household wealth.
Sometimes that leads to the portfolio.
Sometimes it leads to the mortgage.
Once the registered accounts are full, I simply require the portfolio to make a stronger case.