You have extra money at the end of the month. Should you throw it at your mortgage, pay down your credit cards faster, or tackle your car loan? The answer depends on interest rates, psychology, and your personal goals. Here's how to prioritize strategically.
The Interest Rate Rule
The mathematical answer is simple: pay off the highest-interest debt first.
Typical Interest Rate Hierarchy:
| <p> | Debt Type | Typical Rate |
|---|---|---|
| Credit cards | 19-29% | |
| Personal loans | 8-15% | |
| Car loans | 5-10% | |
| Student loans | 3-8% | |
| HELOC | Prime + 0.5-1% | |
| Mortgage | 4-6% | </p> |
Mathematically, every dollar toward credit card debt saves more than a dollar toward your mortgage.
Why the Math Isn't Everything
The Psychological Factor
Some people thrive on momentum:
- Pay off smallest balances first (snowball method)
- Feel wins, stay motivated
- Build confidence and habits
Others are purely analytical:
- Pay highest interest first (avalanche method)
- Mathematically optimal
- May take longer to feel progress
The Risk Factor
Mortgage debt is secured by your home. If life goes sideways:
- Credit card companies can't take your house
- Mortgage default means foreclosure risk
- Having a paid-off home provides security
The Opportunity Factor
Extra mortgage payments guarantee a return equal to your mortgage rate. But if your mortgage rate is 5% and you can earn 7% investing, investing may make more sense.
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When to Prioritize Other Debt Over Mortgage
Pay Credit Cards First If:
✅ You carry a balance month to month
✅ Interest rates exceed 15%
✅ You're only making minimum payments
✅ Your credit score is suffering from high utilization
Why: 20% credit card interest versus 5% mortgage—it's not even close.
Pay Personal/Car Loans First If:
✅ Rates exceed your mortgage rate significantly
✅ Loans have short remaining terms (psychological win coming soon)
✅ Payoff frees up cash flow for other goals
Pay Student Loans If:
✅ High-interest private loans
✅ Psychological burden of debt
✅ Want to access income-tested programs debt-free
When to Prioritize Your Mortgage
Focus on Mortgage If:
✅ All other debts are at rates below your mortgage
✅ Retirement is approaching and you want a paid-off home
✅ Your mortgage is your only debt
✅ You want guaranteed return (mortgage rate = return)
✅ Psychological value of homeownership security
Mortgage Prepayment Strategies:
- Lump-sum payments: Use annual prepayment privileges (typically 15-20%)
- Increased payments: Boost monthly payments by the allowed percentage
- Accelerated payments: Switch to accelerated bi-weekly payments
- Round up: Round payments to the nearest hundred
The Balanced Approach
Step 1: Emergency Fund First
Before aggressive debt repayment:
- 3-6 months expenses in accessible savings
- Protects you from needing new debt when life happens
Step 2: Employer Match
If your employer matches retirement contributions:
- Contribute enough to get the full match
- Free money beats any guaranteed return
Step 3: High-Interest Debt
Attack credit cards and high-rate loans:
- Avalanche method for math optimization
- Snowball method if you need motivation
Step 4: Moderate-Interest Debt
Car loans, personal loans, private student loans:
- Pay above minimums as cash flow allows
- Balance with other goals
Step 5: Low-Interest Debt
Mortgage, government student loans, low-rate HELOCs:
- Make minimum payments or accelerate based on goals
- Consider investing instead if rates are very low
Debt Consolidation: A Middle Path
If you're juggling multiple debts, consolidation can simplify:
Consolidate Into Mortgage:
- Refinance to roll high-interest debt into mortgage
- Single low-rate payment
- Requires home equity
- See our refinancing guide
HELOC:
- Access equity without refinancing
- Pay off credit cards at prime + 0.5-1%
- Revolving access for ongoing management
Personal Consolidation Loan:
- Unsecured (no home risk)
- Fixed payment and term
- Rates vary widely by credit
Special Considerations
Approaching Retirement?
- Mortgage-free home provides security
- Lower fixed expenses in retirement
- Consider accelerating mortgage payoff
High Income Years?
- Maximize RRSP for tax benefits
- Balance debt paydown with tax-advantaged savings
Planning a Major Purchase?
- Keep debt-to-income ratios manageable
- Future mortgage qualification matters
Self-Employed?
- Tax-deductible debt (business, rental) may warrant keeping
- Personal debt payoff often makes sense
FAQ
Q: Should I pay off my mortgage before investing?
A: If your expected investment returns exceed your mortgage rate (after tax), investing may be better. But guaranteed mortgage paydown is risk-free.
Q: Is mortgage debt "good debt"?
A: It's low-interest debt secured by an appreciating asset—but it's still debt. The goal should be eventual payoff.
Q: What about my HELOC?
A: HELOCs have variable rates tied to prime. Pay them down faster when rates are high.
Q: Student loans vs mortgage—which first?
A: Usually student loans if rates are higher or similar. Government student loans have some flexibility private mortgages don't.
Q: How do I choose between investing and debt paydown?
A: If investment returns exceed your highest debt rate (after tax), investing may make sense. But guaranteed debt reduction is risk-free.
What's Next
There's no one-size-fits-all answer—your debt strategy should reflect your rates, psychology, and goals. Schedule a consultation to discuss your specific situation and create a plan that works for you.
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