Pay Off Loans vs Invest: Complete Calculator Analysis
The Bottom Line
⚡ Key Formula
Investment Return > Loan Rate → Invest
Investment Return < Loan Rate → Pay Off
It seems simple, but there are many factors to consider: taxes, prepayment penalties, investment risk, etc. Let's analyze specific scenarios.
Scenario 1: 4% Mortgage vs S&P500
The most common dilemma. With a 4% mortgage and 10% S&P500 average return, investing seems better. Is it really?
| Condition | Pay Off Loan | Invest in S&P500 |
|---|---|---|
| Extra Cash | 1,0000K | 1,0000K |
| 10yr Savings/Returns | +4800K (Guaranteed) | +1,5940K (Average) |
| Tax | None | -2540K (15.4%) |
| Risk | None | Possible Loss |
| Net Benefit | +4800K | +1,3400K (After Tax) |
Even after taxes, investing looks better. But this is the "average." In reality, you could have -20% loss or +30% gain.
Important Considerations
1. Prepayment Penalty
Most loans have prepayment penalties within 3 years, typically 1-1.5% of remaining balance. After 3 years, you can repay without penalty.
🧮 Calculate Prepayment Fee
Prepayment Fee Calculator →2. Tax on Investment Returns
- Financial Income Tax: Comprehensive tax over 20M annually (up to 49.5%)
- Foreign Stock Tax: 22% on gains over 2.5M
- Domestic Stocks: Tax-free for non-major shareholders
3. Peace of Mind
Even if numbers favor investing, the peace of mind from being debt-free is hard to quantify. Choose what lets you sleep well.
4. Interest Rate Risk
Variable rate loans carry interest rate risk. A current 4% could become 6% in 2 years.
Best Choice by Situation
✅ Pay Off When
- • Loan rate is 6%+
- • Limited investment experience or risk-averse
- • Variable rate loan
- • Need to improve credit score
- • Debt causes psychological stress
✅ Invest When
- • Loan rate is 3% or less (fixed)
- • Can invest long-term (10+ years)
- • Can use tax-advantaged accounts
- • Have experience and can handle volatility
- • Have sufficient emergency fund
✅ Compromise: 50/50 Strategy
- • 50% of extra cash to loan repayment
- • Remaining 50% to long-term investment
- • Risk diversification + peace of mind
Practical Calculation Example
You have 30M extra. Mortgage balance is 200M, rate 4%, 20 years left. What should you do?
📊 Simulation Results
Option A: Full Repayment
- 20yr Interest Saved: +1,4400K
- Risk: None
- Guaranteed Return: 4%
Option B: Full Investment
- 20yr Expected (7%): +8,6600K
- Risk: Possible Loss
- After-tax Return: ~5.5%
Option C: 50/50 (Recommended)
- 15M Repayment: +7200K interest saved
- 15M Investment: +4,3300K expected returns
- Total Expected: +5,0500K
Calculate It Yourself
Conclusion
There's no single right answer. Consider rates, investment style, and psychology. If unsure, the 50/50 strategy is safest.