The High Opportunity Cost of Early Mortgage Payoff
Financial expert Robert McLister presents a compelling case that redirecting mortgage cash flows to prudent investments has historically been a winning strategy, despite the psychological comfort of mortgage-free living.
The Psychological Comfort vs. Mathematical Reality
While a mortgage-free home undeniably offers peace of mind, this doesn't necessarily translate to optimal financial outcomes. Homeowners frequently direct extra income toward accelerating mortgage payments, which can be mathematically backward for many individuals despite providing psychological comfort.
Recent Market Performance Demonstrates the Gap
The last twelve months have provided a vivid demonstration of how investing can significantly outperform early mortgage payoff. The Canadian stock market, particularly the S&P/TSX Total Return Index, has made a compelling case for investment over mortgage acceleration.
Consider this striking example: On March 4, 2025, the S&P/TSX Total Return Index stood at 101,979. Twelve months later, that same index surged more than 42 percent. Opportunities for this magnitude of return are exceptionally rare, yet many investors sat on the sidelines out of fear, earning what McLister describes as "a rather expensive education in why timing the market is a losing hobby."
The Historical Performance Gap
Since its inception on January 1, 1977, the S&P/TSX Total Return Index has delivered a compound annual growth rate of 10.66 percent, including reinvested dividends, according to data from the London Stock Exchange Group. Canadian real estate has delivered roughly half that gross return, even after factoring in the principal residence capital gains exemption.
The resulting net worth gap over most long-term periods isn't close, according to McLister's analysis.
A Hypothetical Illustration
To illustrate this point, consider two hypothetical individuals who received a $51,800 inheritance in 1977, equivalent to the average Canadian home price at that time. Person A purchased a typical home with the money, while Person B invested every dollar in equities. The long-term outcome demonstrates the significant opportunity cost of prioritizing mortgage payoff over investment.
Who Should Consider Alternative Strategies?
For well-qualified homeowners with investment horizons exceeding ten years, other fallback assets, and the discipline to maintain well-diversified stock holdings during market volatility, funneling spare cash into equities represents a legitimate and often superior alternative to mortgage prepayment.
McLister emphasizes that this approach requires careful consideration of individual circumstances, including existing debt levels and financial goals. However, for those meeting these criteria, the historical data strongly suggests that investment strategies typically outperform early mortgage payoff in building long-term wealth.
