Over the last month, no fewer than 3 clients have asked me to review this very same question. In two out of the three situations, the interest savings was phenomenal so the use of the TFSA was highly recommended. In the third, there was no significant benefit to using the TFSA to repay the mortgage. What accounted for these vastly-different conclusions? The stage in the amortization schedule.

Mortgages are front-loaded in interest. This means that each payment made in the early years is comprised mostly of interest with very little left over to pay down principal. I certainly remember how disappointing it was to see how little principal was being paid down on those early mortgage statements! Over the amortization period, the ratio flips, with less going to interest and more going to principal. In the later years of a mortgage you are paying very little interest, which can explain why some lucky home-owners have not had to suffer very much as a result of increasing interest rates. For these clients, using a TFSA to repay the mortgage would not improve their long-term financial plan by any significant degree.

Read the full article on the Financial Post

Rising interest rates can be a motivating factor for many in paying off a mortgage, but there are pros and cons to using TFSA savings.