Pay Off Debt or Invest in Canada After Prime Hits 4.70%: Find Your After-Tax Hurdle Rate

Should you pay off debt or invest in Canada? After the Bank of Canada’s October 28, 2026 rate increase, the answer changed for many households. The major banks raised their prime rate to 4.70%, and variable-rate debt got more expensive overnight. The cleanest way to decide is to compare the guaranteed, after-tax return you get by paying down a debt with the after-tax return you can realistically expect from investing. This guide shows how to work out that “hurdle rate,” how TFSA, RRSP and FHSA tax breaks change the math, and where each type of debt usually lands.

Quick Answer

• Paying off a debt gives you a guaranteed return equal to its interest rate, with no tax on that “return.”
• An investment has to beat that rate after tax, and with risk, to be worth choosing first. In a non-registered account, that often means a pre-tax return well above the debt’s rate.
• High-interest debt, like credit cards, almost always wins. Low-rate debt, like a mortgage, is often a closer call, especially when an RRSP refund, FHSA deduction or employer match is on the table.
• Keep an emergency fund and capture any employer RRSP match before making extra debt payments.

What Changed After October 28?

On October 28, 2026, the Bank of Canada raised its policy rate by 0.25 percentage points to 2.50%, its first increase since July 2023. The next day, the big banks raised their prime rate from 4.45% to 4.70%.

Prime is the base for most variable-rate borrowing in Canada. Lines of credit, home equity lines of credit (HELOCs) and variable-rate mortgages are usually priced at prime plus or minus a margin. When prime rises, your payment or interest cost rises with it, unless you have a fixed rate.

The increase is small on its own, but it’s a good moment to revisit whether extra cash should go to debt or to investments. The Bank’s next decision is December 9, 2026.

What Is Your Hurdle Rate?

Your hurdle rate is the return an investment must beat to be a better use of a dollar than paying down a specific debt. Two ideas make it work:

• Paying off debt is a guaranteed, tax-free return. If your line of credit charges 8%, every dollar you repay saves 8 cents a year in interest, with no risk and no tax on the saving.
• Investment returns are uncertain and often taxed. To compare fairly, you need the after-tax return you can expect, not the headline return.

For personal debt where the interest isn’t tax-deductible, the after-tax hurdle is simply the debt’s interest rate. Inside a TFSA, growth is tax-free, so an investment there just has to beat that rate. In a non-registered account, the investment must earn more before tax to come out ahead after tax.

What an investment needs to earn before tax

Here’s the pre-tax return an investment would need to match paying off each debt, at a combined marginal tax rate of about 29.65% (Ontario income of about $60,000 to $107,000):

Formula: pre-tax return needed = debt rate ÷ (1 − tax rate on the investment income). Only 50% of capital gains is taxable, so the effective rate on gains is half your marginal rate. Gains are assumed taxed each year, which overstates the drag for buy-and-hold investors.

The table shows why credit cards almost always come first: no realistic investment reliably earns 21% to 30% a year. It also shows why a mortgage is a closer call: a diversified portfolio could plausibly beat 4.5% to 6% over a long period, but with ups and downs and no guarantee.

A simple example

You have $10,000 and an unsecured line of credit at 8%. Paying it down saves $800 in interest over the next year, guaranteed. To beat that by investing, you’d need more than 8% after tax, every year, with no bad years. Few investors can count on that, so paying down the line of credit wins.

Now say the debt is a fixed-rate mortgage at 4%. Paying it down saves $400 a year on $10,000. A diversified portfolio in a TFSA could plausibly earn more than 4% over the long run, but with no guarantee. That’s a closer call, and your comfort with risk matters.

Where Does Each Debt Land?

Check your actual statements; the ranges are only a guide. Interest stopped accruing on the federal portion of Canada Student Loans on April 1, 2023, though provincial portions may still charge interest.

Why a HELOC needs a fresh look

Many Canadians use a HELOC to consolidate debt or fund renovations. Because a HELOC rate floats with prime, the October 29 increase raised the cost of every dollar owing. If you carry a HELOC balance, recheck your hurdle rate now. Our comparison of a debt consolidation loan vs a HELOC explains the trade-offs.

How Do Registered Accounts Change It?

Registered accounts can tilt the decision toward investing, because they add tax benefits that paying down debt can’t match.

Keep in mind that an RRSP refund isn’t free money: you’ll pay tax when you withdraw. It’s most valuable when your tax rate now is higher than it will be in retirement. Our guide on prioritizing the TFSA, RRSP and FHSA explains how to rank them.

Pro Tip: Combine the two. Contribute to your RRSP or FHSA, then send the tax refund straight to your highest-rate debt. You get the deduction and pay down debt with the same dollars, and the refund works harder on a 9% line of credit than it would sitting in a chequing account.

A balanced approach

1. Build a starter emergency fund so a surprise bill doesn’t go on a credit card. See our guide on whether to pay off debt or build an emergency fund first.
2. Capture any employer RRSP match.
3. Pay off credit cards and other high-interest debt.
4. Split extra money between mid-rate debt, such as a line of credit or HELOC, and registered accounts, based on your hurdle rate.
5. Invest more once only low-rate debt, such as a mortgage or federal student loan, remains.

Interest on money borrowed to earn income from a non-registered investment can be tax-deductible in some cases, which lowers its true cost. The rules are detailed, so ask a tax professional before relying on that.

Key Takeaways

• The Bank of Canada raised its policy rate to 2.50% on October 28, 2026, and banks raised prime to 4.70% the next day, increasing costs on variable-rate debt.
• Paying down debt gives a guaranteed, tax-free return equal to its interest rate; that’s your hurdle rate.
• In a non-registered account, an investment usually needs a pre-tax return well above the debt’s rate to win; in a TFSA, it just needs to beat the rate.
• Credit cards and high-rate loans almost always come first; mortgages and federal student loans usually come last.
• RRSP refunds, employer matches and FHSA deductions can make investing the better first move, especially if you use the refund to pay down debt.
• Keep a basic emergency fund before making large extra debt payments.

Frequently Asked Questions

Should I pay off my mortgage or invest in Canada?

It depends on your mortgage rate, tax bracket and risk tolerance. Many people with low fixed-rate mortgages invest first in a TFSA, RRSP or FHSA, especially when a tax refund or employer match is available. If your mortgage rate is renewing much higher, prepayments become more attractive.

What is the prime rate in Canada now?

The major banks’ prime rate is 4.70%, effective October 29, 2026, after the Bank of Canada’s October 28 decision. Check your lender’s current rate, since prime changes after each rate decision.

Is paying off debt a guaranteed return?

Yes. Every dollar of debt you repay saves you its interest rate with certainty, and that saving isn’t taxed.

Should I stop RRSP contributions to pay off debt?

Usually not if your employer matches contributions. Without a match, compare the RRSP refund and long-term growth against your debt’s interest rate. For high-interest debt like credit cards, paying it off first usually wins.

How do I calculate my own hurdle rate?

Start with each debt’s interest rate. For a TFSA, that’s the return you need to beat. For a non-registered account, divide the debt rate by one minus the tax rate on the investment income: for example, 6% ÷ (1 − 0.15) ≈ 7.1% if your gains are effectively taxed at 15%.

Conclusion

Pay off debt or invest in Canada? Start by finding the hurdle rate for each debt, its interest rate, and compare it with what you can realistically earn after tax. With prime now at 4.70%, variable-rate debt costs more than it did a week ago, while registered-account tax breaks still reward investing. Build an emergency fund, capture any match, clear high-interest debt, then split what’s left. To map every debt and goal in one place, try the free planner below.

Canadian Money Planner 2026 Edition (free) Budget, savings, debt and goals in one place. Get the free planner.

Official sources: Bank of Canada: Policy interest rate; Government of Canada: Canada Student Loans interest; CRA: RRSP, TFSA and FHSA.