Rahul Bedi · Mortgage Broker · Team Active Mortgage
Prepay and Invest Setup Guide
Got extra cash each month? Here's how to decide between paying down your mortgage, investing, or doing both — and how to set it up.
What "prepay and invest" means
You have three basic choices for extra money each month.
Prepay
Put extra money on your mortgage using your prepayment privileges — lump-sum payments and payment increases. Many closed mortgages allow something like 10–20% of the original balance per year, but it varies by lender and product, so check your mortgage terms. Going over can trigger a penalty.
Invest
Put the extra into a TFSA, an RRSP, an FHSA (if you're eligible as a first-time buyer) or a non-registered account.
Both — the readvanceable strategy
With a readvanceable mortgage (a mortgage plus a HELOC that grows as you pay down principal), you prepay, then re-borrow the freed-up room to invest. Interest on money borrowed to earn investment income in a non-registered account may be tax-deductible — confirm with an accountant. This general idea is popularly known as the Smith Manoeuvre. It adds leverage and risk.
How to set it up in 6 steps
- 1
Check your prepayment privileges
Find your lump-sum % and payment-increase % in your mortgage commitment or lender portal.
Ask your lender: what's my annual lump-sum limit and payment-increase limit?
- 2
Compare rate vs return
Prepaying is a guaranteed 'return' equal to your mortgage rate; investing is uncertain. Include taxes — TFSA growth is tax-free and an RRSP gives a deduction now.
Do: write down your mortgage rate and a realistic after-tax return.
- 3
Pick a lane
Prepay, invest, split the extra, or use the readvanceable strategy.
Do: use the decision cards and calculator below.
- 4
Set it up
Request a prepayment or payment increase with your lender, and open a TFSA, RRSP, FHSA or non-registered account. For the readvanceable route, Rahul can help you qualify for and set up a readvanceable mortgage — subject to lender approval.
Ask: is my mortgage readvanceable, or would I need to switch?
- 5
Automate it
Set an automatic payment increase or scheduled lump sum, and automatic contributions on payday.
Do: schedule contributions for the day after payday.
- 6
Review yearly and at renewal
Re-check rates, privileges, contribution room and your goals.
Do: put a yearly reminder in your calendar.
Pick your lane
Prepay
Risk: LowBest if… You want a guaranteed result, value being debt-free sooner, or your mortgage rate is high relative to expected returns.
Watch out for… Annual prepayment limits and penalties; money in your home is harder to access.
Invest
Risk: MediumBest if… You have unused TFSA, RRSP or FHSA room, a long time horizon and comfort with market swings.
Watch out for… Returns aren't guaranteed and can be negative; taxes on non-registered gains.
Split
Risk: MediumBest if… You want some guaranteed progress on the mortgage and some long-term growth.
Watch out for… Keep the split automated so it actually happens.
Readvanceable
Risk: HigherBest if… Stable income, long horizon, high risk tolerance and disciplined record-keeping.
Watch out for… Leverage secured by your home, floating HELOC rates, and tax rules — get tax and investment advice.
Prepay vs invest — illustrative comparison
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Illustrative assumptions
A · Prepay path
- Interest saved (10 yrs)
- $17,428
- Balance at year 10
- $217,756
- Time cut off amortization
- 7 yr 3 mo
B · Invest path
- Portfolio at year 10
- $81,940
- Mortgage balance at year 10
- $295,185
- Regular payment
- $2,326/mo
C · Net position at year 10
Under these assumptions, the invest path came out ahead by roughly $4,511.
Net position = investments minus mortgage balance. Prepay: -$217,756 · Invest: -$213,245
Illustrative assumptions
Assumes a $400,000 balance, a 5.00% mortgage rate, 25-year remaining amortization, $500/month extra and a 6.00% annual return, compounded monthly, constant over the 10-year period, with tax-free (TFSA) growth. Mortgage interest uses Canadian semi-annual compounding converted to an effective monthly rate. If a mortgage is paid off within the horizon, the freed-up regular payment plus extra is assumed to be invested at the same return, so both paths keep using the same monthly cash. Not current rates, not a forecast, not a promise. Real returns vary and can be negative. Ignores penalties, fees, contribution limits and RRSP refunds.
Worked example · illustrative
Sam has $500/month extra, a $400,000 mortgage at an assumed 5.00% with 25 years left, and assumes a 6.00% annual investment return in a TFSA over 10 years. Prepaying cuts years off Sam's amortization and saves interest with certainty. Investing builds a portfolio that, under these assumptions, may end up slightly ahead — but only if that return actually happens, which isn't guaranteed. Change the numbers above to see how sensitive the result is.
Who it suits — and who it doesn't
Suits
- Stable income
- Emergency fund in place (3–6 months)
- No high-interest debt
- Comfortable with market ups and downs (for investing or readvanceable)
- Disciplined with borrowed room
Not a fit (yet)
- Carrying credit card or high-interest debt (pay that first)
- No emergency fund
- Uncertain job or income
- Low risk tolerance
- Needs the cash within a few years
- Tempted to spend HELOC room
Common mistakes
- 1. Exceeding prepayment limits and paying a penalty.
- 2. Investing borrowed money in a registered account and expecting an interest deduction.
- 3. Mixing personal and investment borrowing in one HELOC — track it separately.
- 4. Ignoring the tax on non-registered gains.
- 5. Forgetting unused TFSA, RRSP or FHSA room.
- 6. Never reviewing the plan at renewal.
Frequently asked questions
Keep learning
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Book a call with RahulThis guide is for general educational purposes only and is not financial, investment, tax or legal advice. All figures are illustrative assumptions, not current rates or a forecast. Consult a licensed financial advisor and an accountant before acting. Mortgage products are subject to lender approval and terms vary by lender. Rahul Bedi, Mortgage Broker, Team Active Mortgage — NS Broker #3000996, under Mortgage Architects.