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No. Paying off a mortgage ends the interest expense, but it does not erase the cost of tying your equity up in the home. Property taxes and maintenance also continue. Ben Felix’s 5% rule is a rough way to compare rent with an owner’s unrecoverable costs—not a claim that every mortgage-free owner pays 5% of the home’s value in cash each year.
What the 5% rule actually compares
The rule compares rent with the costs of owning that do not build equity or otherwise leave the owner with an asset. In his 2019 explanation, Ben Felix breaks the rough annual estimate into about 1% of the home’s value for property taxes, 1% for maintenance, and 3% for the cost of capital. Those percentages are components of a heuristic, not measured averages that apply to every home or market. Felix’s explanation of the rule describes the framework.
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Mortgage payments are not a like-for-like measure of rent because they combine interest and principal. Interest is a cost; principal repayment builds equity. As Felix put it in the podcast transcript, “A mortgage payment is not an unrecoverable cost. It’s a mix of interest and forced savings.”
A quick screening calculation
Multiply the home value by 5%, then divide by 12 to estimate a monthly ownership cost under the rule. For example, Money.ca illustrates that $3,000 monthly rent corresponds to a $720,000 home at 5%: $720,000 × 0.05 ÷ 12 = $3,000. That is arithmetic based on the heuristic, not a claim about prevailing rents or home prices. Money.ca explains the example and the original reader question.
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For an actual decision, replace the round assumptions with the home’s local property tax, realistic maintenance costs, financing terms, and the household’s relevant alternative investment. Compare rent for a genuinely comparable home, not simply any available rental.
Why payoff does not make housing economically free
Once the mortgage is paid, the owner no longer pays interest on the loan. But the equity remains committed to the property. The owner could instead sell, pay transaction costs, and invest the proceeds; the return forgone by keeping that capital in the home is an implicit cost, sometimes called “implicit rent.” It is not a bill paid each month, but it matters when comparing owning with renting and investing.
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A 2017 PWL Capital paper illustrates the idea with a hypothetical $500,000 home. Assuming 5% sale costs and a 5.1% expected return for a portfolio with 50% equity, it calculates an opportunity cost of $24,225 a year, or $2,018 a month, before adding the example’s property taxes and maintenance. These are the paper’s assumptions, not a current forecast or recommended return. Read the PWL Capital analysis.
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This distinguishes cash flow from economic cost. Paying off the loan can make monthly cash flow much easier because both principal and interest payments stop. But that improvement does not mean the home now has only a 2% economic cost: the equity still has an alternative use, and taxes and upkeep remain. Ownership can also offer stability, control, and forced saving. Those benefits matter, but they are separate from the financial comparison.
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When 5% may be the wrong input
The 5% figure is not a universal rate or a verdict for every household. Felix has suggested that a conservative investor or someone investing in taxable accounts may use a figure closer to 4%, while the 5% heuristic may better fit an aggressive investor with tax-advantaged RRSP or TFSA room. This is a suggested adjustment from his 2019 explanation, not a guaranteed correct rate. The transcript discusses the assumptions behind that adjustment.
- Investment alternative: The relevant opportunity cost depends on expected returns and the risk taken to pursue them. A higher-risk portfolio is not a guaranteed substitute for home equity.
- Taxes and account type: Tax treatment can change the return available from investing elsewhere. Canadian principal-residence treatment may also affect an after-tax comparison; the CRA’s archived guidance describes eligibility and reporting conditions, including use of the home to earn income. Check current CRA guidance before relying on tax rules. CRA principal-residence guidance (archived).
- Property and location: Actual property taxes and maintenance can be materially different from the rule’s round 1% assumptions. Felix’s transcript notes that maintenance data are not readily available and that readers disagree about whether the 1% allowance is too high or low.
- Liquidity and diversification: Home equity is tied to one property and is less readily available than a diversified investment portfolio. Selling to access it also involves transaction costs.
- Household behavior and preferences: A rent-and-invest comparison assumes the renter actually invests the money not spent on ownership. Stability and control may also be worth something to a household even though they are not captured by the percentage calculation.
How to make the comparison for your household
- Find rent for a comparable home. Match location, size, condition, and features as closely as possible.
- Estimate ownership’s unrecoverable costs. Include property taxes and realistic ongoing maintenance, plus mortgage interest if there is still a loan. Do not count principal repayment as an expense in the same way as rent.
- Account for capital tied up in the home. Estimate the return the home equity could reasonably earn in an alternative investment, taking risk, tax treatment, liquidity, and transaction costs into account.
- Use the 5% figure only as a first pass. Compare the result with your actual local costs and assumptions rather than treating 5%—or a supposed 2% after payoff—as a universal answer.
- Consider non-financial benefits separately. Stability, control, and the discipline of forced saving can influence the decision, but do not make the implicit cost of equity disappear.
The right conclusion is household- and market-specific. The rule helps identify which costs belong in the comparison; it cannot establish one correct return assumption or determine whether renting or owning is better for every person.
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