XEQT vs Paying Off Your Mortgage: The Great Canadian Investing Debate

My buddy Mike and I have been having the same argument for three years. Every time we grab a beer, it comes up: “Should I throw my extra cash at my mortgage, or put it into XEQT?”

Mike’s a mortgage-first guy. He doubled up his payments, threw every bonus at his principal, and burned through his mortgage in 12 years. He sleeps like a baby knowing his house is fully paid off.

Me? I made minimum mortgage payments and funnelled every extra dollar into XEQT inside my TFSA and RRSP. Mathematically, I’m confident I’ll come out ahead. But I’ll admit — there are nights when I look at my mortgage balance and wonder if Mike’s got the right idea.

This is the great Canadian personal finance debate. And the honest answer is: it depends on you. But let me show you the math, the tax angles, and the psychology so you can make the right call for your situation.

1. The Core Math: XEQT Returns vs Mortgage Interest

Let’s start with the numbers, because that’s what most people really want to know.

Mortgage rates in Canada (2026):

• Variable rates: ~4.0–4.5%
• Fixed 5-year rates: ~4.2–4.8%
• Average effective rate for most homeowners: roughly 4–5%

XEQT historical returns:

• Since inception (2019): approximately 9–10% annualized
• Global equity markets long-term average: ~8–10% annualized
• Conservative forward estimate: 7–8% after fees

When you make an extra mortgage payment, you earn a guaranteed, risk-free, after-tax return equal to your mortgage interest rate. If your rate is 4.5%, every extra dollar you put on the mortgage “earns” you 4.5% by avoiding that interest charge.

When you invest in XEQT, you earn an expected but not guaranteed return that has historically averaged 8–10% — but could be negative in any given year.

Here’s the basic math:

On paper, XEQT wins. A 3–5% spread in your favour over 20+ years adds up to a massive difference. But “on paper” and “in real life” aren’t always the same thing.

2. The $500/Month Showdown: Mortgage vs XEQT Over Time

Let’s make this concrete. Say you have an extra $500/month after all your bills are paid. You’ve got a $400,000 mortgage at 4.5% with 20 years remaining. You can either:

Option A: Put that $500/month toward extra mortgage payments Option B: Invest that $500/month in XEQT (assuming 8% average annual return)

Assumptions: 8% annualized XEQT return, 4.5% mortgage rate, investments held in a TFSA (tax-free growth). Mortgage savings calculated as total interest avoided by accelerating payments. Numbers are approximate illustrations.

That 20-year difference — almost $187,000 — is life-changing money. It’s the difference between a comfortable retirement and an early one.

But here’s the catch: those XEQT returns aren’t guaranteed. In the worst 20-year period for global equities, returns were closer to 4–5% annualized. In that scenario, the two options end up roughly the same. You’re betting on history repeating — which it probably will, but “probably” isn’t “definitely.”

3. The Tax Advantage That Tips the Scales

Here’s where the XEQT case gets even stronger: TFSA and RRSP sheltering.

In Canada, mortgage interest on your primary residence is not tax-deductible (unlike the US). So whether you pay off your mortgage faster or slower, there’s no tax break either way.

But XEQT gains inside a TFSA? Completely tax-free. Forever. No capital gains tax, no tax on dividends, no tax when you withdraw. That 8% return is a true 8% return.

XEQT inside an RRSP? You get a tax deduction on the contribution, the investments grow tax-deferred, and you only pay tax when you withdraw (ideally in retirement at a lower tax bracket).

This means:

Even in a non-registered account, XEQT likely beats mortgage paydown — though the gap narrows significantly. In a TFSA? It’s not even close.

If you have unused TFSA or RRSP contribution room, the case for investing in XEQT instead of accelerating your mortgage is very strong. You’re leaving tax-sheltered room on the table by paying down cheap debt instead.

4. The Case for Paying Off Your Mortgage

I’ve made a strong mathematical case for XEQT. But money isn’t just math. Here’s when paying off your mortgage makes a lot of sense:

Your mortgage rate is high (5.5%+)

If you’re locked into a high rate or facing renewal at elevated rates, the guaranteed return of eliminating that interest gets much more attractive. At 6%, the spread between mortgage paydown and expected XEQT returns narrows to maybe 2–3% — and you’re taking on zero risk.

You’re close to retirement

If you’re within 5–10 years of retirement, having a paid-off house means dramatically lower monthly expenses. That security is worth more than a few percentage points of expected return.

You can’t handle volatility

Be honest with yourself. If a 20% market drop would cause you to panic-sell your XEQT, you’re better off paying down your mortgage. A guaranteed 4.5% return that you’ll stick with beats a theoretical 8% return that you’ll abandon at the worst possible moment.

Your mortgage is almost paid off

If you owe $50,000 on your mortgage, the psychological victory of eliminating it entirely might be worth more than the marginal investment gains.

You have no other debts and maxed out registered accounts

If your TFSA and RRSP are fully contributed and you have no other debts, paying down the mortgage is a solid, risk-free use of extra cash.

5. The Case for Investing in XEQT

You have unused TFSA/RRSP room

This is the big one. Every year you don’t fill your TFSA, that tax-free contribution room carries forward — but the compounding time you’ve lost is gone forever. A dollar invested in your TFSA today has more compounding runway than a dollar invested next year.

Your mortgage rate is below 5%

The lower your rate, the bigger the expected spread between XEQT returns and mortgage interest. At 4%, you’re looking at a 4%+ expected premium for investing instead. Over decades, that’s enormous.

You’re young with a long time horizon

If you’re in your 20s or 30s with 25+ years until retirement, you have time to ride out market volatility. The longer your horizon, the more likely XEQT will significantly outperform your mortgage rate.

You value liquidity

Extra mortgage payments are locked in your house. You can’t easily get them back without refinancing or selling. XEQT in your TFSA? You can sell and withdraw anytime if life throws you a curveball.

You want diversification

Your house is already a massive, undiversified, leveraged bet on Canadian real estate. Adding XEQT gives you exposure to 9,000+ companies across 49 countries. That’s genuine diversification.

6. The “Why Not Both?” Strategy

Here’s the thing about this debate: it doesn’t have to be all-or-nothing.

My favourite approach — and what I actually do — is to split the difference. Here’s a framework:

The 70/30 Split

• Put 70% of your extra cash toward XEQT (prioritize filling your TFSA first)
• Put 30% toward extra mortgage payments

The “Fill TFSA First” Strategy

1. Make your minimum mortgage payment
2. Max out your TFSA with XEQT ($7,000/year in 2026)
3. Whatever’s left goes toward extra mortgage payments

The “Rate Threshold” Strategy

• If your mortgage rate is below 4%: invest 100% of extra cash in XEQT
• If your rate is 4–5%: split 70/30 in favour of XEQT
• If your rate is 5–6%: split 50/50
• If your rate is above 6%: prioritize mortgage paydown

The “Age-Based” Approach

• Under 35: Prioritize XEQT (you have decades of compounding ahead)
• 35–50: Split based on your mortgage rate and risk tolerance
• Over 50: Lean toward mortgage paydown for retirement security

There’s no single right answer. The best strategy is the one you’ll actually follow consistently.

7. What About the Smith Manoeuvre?

You might have heard of the Smith Manoeuvre — a strategy where you borrow against your home equity to invest, making the interest tax-deductible. It effectively turns your non-deductible mortgage into deductible investment debt.

It’s a real strategy, and it works mathematically. But I don’t recommend it for most people because:

• It adds significant complexity and leverage to your financial life
• It requires discipline and a long time horizon
• If the market drops 30% while you’re leveraged, the psychological pressure is enormous
• The tax benefit doesn’t fully compensate for the added risk for most investors

If you’re interested, talk to a fee-only financial planner. For the average Canadian investor, simply buying XEQT in your TFSA while making regular mortgage payments is simpler, safer, and still highly effective.

8. The Renewal Risk Factor

One thing that rarely gets mentioned in this debate: mortgage renewal risk.

In Canada, most mortgages renew every 5 years. That means your “cheap” 3.5% mortgage from 2021 might be renewing at 4.5–5% in 2026. And your next renewal in 2031? Nobody knows what rates will be.

This creates a strong argument for at least some extra mortgage payments. By reducing your principal before renewal, you reduce the balance that a potentially higher rate applies to. It’s a form of hedging against interest rate risk.

A reasonable approach:

• Make modest extra mortgage payments to reduce renewal risk
• Invest the bulk of your extra cash in XEQT for higher expected returns
• Revisit the split at each renewal based on your new rate

9. A Decision Framework: Which Is Right for You?

Still not sure? Walk through this checklist:

Lean toward XEQT if:

• Your mortgage rate is below 5%
• You have unused TFSA or RRSP contribution room
• You’re more than 10 years from retirement
• You can handle seeing your portfolio drop 20–30% without panicking
• You value liquidity and flexibility
• Your only debt is your mortgage (no credit cards, car loans, etc.)

Lean toward mortgage paydown if:

• Your mortgage rate is above 5.5%
• Your TFSA and RRSP are already maxed out
• You’re within 10 years of retirement
• Market volatility keeps you up at night
• You have a small remaining mortgage balance
• Debt-free living is a core personal value for you

Do both if:

• Your rate is in the 4–5.5% range and you can’t decide
• You want the psychological benefit of mortgage progress AND investment growth
• You have enough extra cash to make meaningful contributions to both

10. What I Actually Do (And What I’d Recommend)

I’ll be transparent about my own approach.

My mortgage rate is currently 4.3%. I have TFSA room available and a long time horizon. So here’s what I do:

1. Minimum mortgage payments — I’m not paying a cent more than required
2. Max out my TFSA with XEQT — $7,000/year, automatically invested via Wealthsimple
3. Contribute to my RRSP — enough to optimize my tax refund, also in XEQT
4. Any leftover cash — split between mortgage lump-sum payments and topping up investments

I’ll revisit this at my next mortgage renewal. If rates spike above 6%, I’ll shift more toward the mortgage. But at current rates, the math overwhelmingly favours investing.

And Mike? He’s mortgage-free and happy. I’m not going to tell him he’s wrong — because for his risk tolerance and his peace of mind, he made the right choice. The best financial plan is one you can follow without losing sleep.

The Bottom Line

For most Canadian investors with a mortgage rate under 5% and unused TFSA/RRSP room, investing in XEQT will likely produce better long-term results than accelerating mortgage payments. The expected return spread of 3–5%, compounded over decades inside tax-sheltered accounts, creates a significant wealth advantage.

But “likely” and “expected” are doing heavy lifting in that sentence. Paying off your mortgage is the only guaranteed return you’ll ever find. If that guarantee matters more to you than the expected premium from investing, that’s a perfectly valid choice.

The worst thing you can do? Nothing. Whether you invest in XEQT, pay down your mortgage, or split the difference — the important thing is that you’re doing something productive with your extra cash.