Owning your home outright—doesn’t that sound like a dream? With mortgage rates still high and the cost of living rising, many Canadians are wondering: Should I dip into my TFSA to pay off my mortgage faster?
A Tax-Free Savings Account (TFSA) is a powerful investment tool for growing money tax-free, while a mortgage is often the biggest debt Canadians carry. So, is it a smart move to use your TFSA savings to eliminate that debt sooner?
Before making a big decision, let’s break it down. We’ll explore the pros, cons, and alternative strategies to help you determine whether this approach makes sense for your financial future.
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The Case for Using TFSA Funds to Pay Off Your Mortgage
Imagine this: You’re 45 years old with $100,000 in your TFSA, and you have 10 years left on your mortgage. Your mortgage rate is 5.5%, and your remaining balance is $100,000. You’re considering using that TFSA money to knock down a chunk of your mortgage. Here’s why it might make sense:
1. Avoiding Interest Costs
Mortgage interest adds up fast. If your mortgage is at 5.5% and you have 10 years left, you could end up paying over $29,863.26 in interest. By pulling money from your TFSA, you could save yourself that expense.
Unlike investments, mortgage interest on your primary residence isn’t tax-deductible (unless you’re using the Smith Manoeuvre). Every dollar you pay towards interest is money that’s not working for you.
If your TFSA investments are earning 3-4% and your mortgage interest rate is higher, using TFSA funds to pay off your mortgage could actually save you money.
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2. Peace of Mind and Cash Flow Relief
Being mortgage-free means freeing up cash flow for other priorities—whether that’s saving for retirement, traveling, or simply enjoying life with less financial stress.
Eliminating your mortgage payment increases your financial flexibility and allows you to focus on long-term goals like investing or early retirement.
3. Guaranteed Returns vs. Market Uncertainty
Investing in stocks or ETFs through your TFSA comes with risk. While your TFSA has been growing, a market downturn could wipe out some of the gains.
Using your TFSA to pay off your mortgage is like getting a guaranteed return equal to your mortgage interest rate. If your mortgage rate is 5% and the market underperforms, paying off your mortgage could be the safer bet.
The Case Against Using TFSA Funds for Mortgage Payoff
Before you make a withdrawal, consider the downsides. Using your TFSA to pay off your mortgage might not always be the best financial move. Here’s why:
1. Lost Tax-Free Growth
One of the biggest benefits of a TFSA is compounding tax-free growth. If your TFSA is invested in high-growth assets, withdrawing money now could mean missing out on significant future gains.
For example, if $100,000 in your TFSA doubles over 10 years at a 7% return, pulling it out now means losing that $96,715.14 in growth potential.
2. Rebuilding Your TFSA Takes Time
Unlike RRSPs, TFSA withdrawals allow you to recontribute—but not until the following year.
If you withdraw $100,000 today, you won’t regain that contribution room until January 1st of next year. If you don’t have extra income to replenish your TFSA, you miss out on future tax-free growth.
3. Emergency Fund Considerations
If your TFSA serves as your emergency fund, think twice before using it to pay off your mortgage. Unexpected expenses—job loss, medical bills, or car repairs—can arise at any time.
If you empty your TFSA, you might end up needing a loan later at a higher interest rate than your mortgage.
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When It Make Sense to Pull Money from TFSA to Pay Off Mortgage
✅ You’re Nearing Retirement
If you’re close to retirement and want to reduce fixed expenses, becoming mortgage-free might be worth sacrificing some TFSA growth.
✅ High-Interest Mortgage
If your mortgage rate is 6% or higher and your TFSA investments aren’t yielding better returns, paying off your mortgage could provide significant savings on interest payments.
✅ Your TFSA Is in Low-Growth Investments
If your TFSA is sitting in a low-interest savings account earning 1-2%, it’s not growing much. In this case, using it to pay down a high-interest mortgage could be a smarter move.
✅ You Have No Other High-Interest Debt
Before you touch your TFSA, make sure you’re not carrying high-interest debt like credit cards or personal loans. Paying off a 5% mortgage while holding onto a 20% credit card balance isn’t the best financial move.
✅ Market Downturn Protection
If your TFSA investments have performed poorly, cashing out to pay off debt could minimize further losses and provide a psychological win.
When It Might Not Be a Good Idea
❌ You Have a Low Mortgage Rate
If your mortgage rate is 2-3%, your debt is relatively cheap. Your TFSA investments might yield better long-term returns, making it more beneficial to let your TFSA grow.
❌ High-Performing Investments
If your TFSA portfolio is generating 8%+ returns, pulling out money to save 4-5% mortgage interest isn’t optimal.
❌ Tax-Free Compound Growth Potential
If you’re younger with time on your side, keeping money in your TFSA allows compounding to work in your favor.
❌ Your TFSA Is Your Primary Investment Account
If your TFSA is your only investment account and you don’t have an RRSP or pension, it may be better used for wealth-building rather than mortgage payoff.
❌ No Emergency Fund
Draining your TFSA could leave you vulnerable to financial shocks. If an emergency arises, you may be forced to borrow at higher interest rates.
Alternative Strategies
If you’re debating whether to pull money from TFSA to pay off mortgage debt, consider these alternatives:
1. Make Lump-Sum Prepayments
Instead of draining your TFSA, use your lender’s annual lump-sum prepayment options (typically 10-20% of the principal per year) to gradually pay down your mortgage while keeping your investments intact.
2. Boost Your Monthly Payments
Increasing your regular mortgage payments—even by $100/month—can significantly reduce interest costs and shorten your amortization period.
3. Balance Investing and Mortgage Payoff
Instead of an all-or-nothing approach, consider withdrawing a portion of your TFSA while keeping some invested.
4. Consider RRSP Withdrawals Instead
If you’re in a high tax bracket now but expect to be in a lower one in retirement, RRSP withdrawals (if structured correctly) could be a better source of funds than your TFSA.
5. Refinance to a Lower Interest Rate
If interest rates drop, refinancing could reduce your mortgage costs without dipping into your TFSA.
Final Thoughts: What’s Right for You?
At the end of the day, deciding whether to pull money from your TFSA to pay off your mortgage is personal. Consider your financial goals, risk tolerance, and cash flow needs before making a decision.
If the thought of being mortgage-free excites you and you’re not sacrificing high investment returns, it might be a great move. But if your TFSA is your long-term wealth builder, keeping it growing tax-free could be the smarter choice.
Whichever route you take, make sure you have a solid financial plan in place. And remember—your money should work for you, not the other way around!
Would you consider using your TFSA to pay off your mortgage? Let me know in the comments below!
