Your 4.75% Savings Account Loses to a 4% Mortgage: The After-Tax Math Canadian Investors Miss
A Toronto-based consultant keeps $85,000 in a high-yield savings account at 4.75% while carrying a $220,000 mortgage at 4.2%. She thinks the spread favours savings. It doesn't. At her marginal tax rate of 48.2%, the savings account delivers 2.46% after tax. The mortgage costs her 4.2%. She's paying 1.74% per year for the privilege of liquidity, which works out to roughly $3,700 on the cash she's holding.
The after-tax return on taxable interest is always lower than the headline rate, often far lower, but most investors still compare nominal figures when deciding whether to hold cash or pay down debt. Mortgage interest isn't deductible on a primary residence in Canada. Savings interest is taxed as income at your full marginal rate. The asymmetry means a 5% savings account and a 4% mortgage are not a 1% spread. For high earners, it's closer to break-even, and in several provinces, savings lose.
The formula that flips the decision
The break-even rate is the pre-tax yield your savings account must deliver to match what you'd save by paying down the mortgage. It's:
Mortgage Rate ÷ (1 − Marginal Tax Rate)
For a borrower in BC's top bracket (53.53% combined federal-provincial as of 2026), a 4% mortgage requires a savings account paying 8.61% just to tie. Ontario's top rate of 53.53% produces the same threshold. Quebec's 53.31% puts it at 8.57%. Alberta, with a top combined rate of 48%, still requires 7.69% at the top bracket.
Those thresholds are all well above current high-balance savings account rates, which range from 1.50% to 4.75% as of mid-2026. A client holding cash at 4.75% nominal in a 50% bracket is earning 2.38% after tax while paying 4% on the mortgage. The delta is 1.62%, and it runs against them every month.
Where taxable cash makes sense anyway
The formula doesn't dictate the decision. It prices it.
Emergency liquidity has value that can't be modelled in a percentage. You can't re-borrow mortgage principal on demand unless you have a HELOC already open. A self-employed contractor with variable income might rationally accept the 1.62% cost to keep six months of operating expenses accessible, because the alternative is getting caught short in a slow quarter with no credit backstop.
Business owners holding sale proceeds or contractors waiting to deploy capital into a project often sit in cash for 8-14 months. If the after-tax cost is quantified, some will shift the funds to a TFSA where the 4.75% rate is tax-free. Some recognize they're paying $2,800 a year on a $175,000 balance for flexibility they may not need and move the excess against the mortgage when the mortgage rate is low enough. A borrower who locked in at 1.79% in 2021 and still has that rate needs a savings account paying only 3.85% after tax to break even in the 53.53% bracket, which translates to an 8.3% nominal rate, still out of reach, but the gap is wider and the decision becomes more defensible.
The TFSA carve-out
Inside a TFSA, the comparison is one-to-one. A 4% savings rate beats a 4% mortgage because there's no tax drag. The 2026 contribution limit is $7,000 annually, which accumulates if unused. A 40-year-old who has never contributed has $109,000 in available room. Filling that space with cash earning 4.75% gives a true 4.75% return, and only the amount beyond the TFSA room enters the after-tax calculation.
For clients in the 50-53% brackets, the break-even rate on taxable cash is typically 7.7% to 8.6%, depending on province. Anything below that threshold costs money relative to paying down the mortgage. The decision to hold cash anyway is fine, but it's no longer a feeling. It's a number, and the number has a cost.
A Toronto-based consultant keeps $85,000 in a high-yield savings account at 4.75% while carrying a $220,000 mortgage at 4.2%. She thinks the spread favours savings. It doesn't. At her marginal tax rate of 48.2%, the savings account delivers 2.46% after tax. The mortgage costs her 4.2%. She's paying 1.74% per year for the privilege of liquidity, which works out to roughly $3,700 on the cash she's holding.
The after-tax return on taxable interest is always lower than the headline rate, often far lower, but most investors still compare nominal figures when deciding whether to hold cash or pay down debt. Mortgage interest isn't deductible on a primary residence in Canada. Savings interest is taxed as income at your full marginal rate. The asymmetry means a 5% savings account and a 4% mortgage are not a 1% spread. For high earners, it's closer to break-even, and in several provinces, savings lose.
The formula that flips the decision
The break-even rate is the pre-tax yield your savings account must deliver to match what you'd save by paying down the mortgage. It's:
Mortgage Rate ÷ (1 − Marginal Tax Rate)
For a borrower in BC's top bracket (53.53% combined federal-provincial as of 2026), a 4% mortgage requires a savings account paying 8.61% just to tie. Ontario's top rate of 53.53% produces the same threshold. Quebec's 53.31% puts it at 8.57%. Alberta, with a top combined rate of 48%, still requires 7.69% at the top bracket.
Those thresholds are all well above current high-balance savings account rates, which range from 1.50% to 4.75% as of mid-2026. A client holding cash at 4.75% nominal in a 50% bracket is earning 2.38% after tax while paying 4% on the mortgage. The delta is 1.62%, and it runs against them every month.
Where taxable cash makes sense anyway
The formula doesn't dictate the decision. It prices it.
Emergency liquidity has value that can't be modelled in a percentage. You can't re-borrow mortgage principal on demand unless you have a HELOC already open. A self-employed contractor with variable income might rationally accept the 1.62% cost to keep six months of operating expenses accessible, because the alternative is getting caught short in a slow quarter with no credit backstop.
Business owners holding sale proceeds or contractors waiting to deploy capital into a project often sit in cash for 8-14 months. If the after-tax cost is quantified, some will shift the funds to a TFSA where the 4.75% rate is tax-free. Some recognize they're paying $2,800 a year on a $175,000 balance for flexibility they may not need and move the excess against the mortgage when the mortgage rate is low enough. A borrower who locked in at 1.79% in 2021 and still has that rate needs a savings account paying only 3.85% after tax to break even in the 53.53% bracket, which translates to an 8.3% nominal rate, still out of reach, but the gap is wider and the decision becomes more defensible.
The TFSA carve-out
Inside a TFSA, the comparison is one-to-one. A 4% savings rate beats a 4% mortgage because there's no tax drag. The 2026 contribution limit is $7,000 annually, which accumulates if unused. A 40-year-old who has never contributed has $109,000 in available room. Filling that space with cash earning 4.75% gives a true 4.75% return, and only the amount beyond the TFSA room enters the after-tax calculation.
For clients in the 50-53% brackets, the break-even rate on taxable cash is typically 7.7% to 8.6%, depending on province. Anything below that threshold costs money relative to paying down the mortgage. The decision to hold cash anyway is fine, but it's no longer a feeling. It's a number, and the number has a cost.
Sources
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