You have cash on hand — pay down the mortgage?
When people save up a lump sum (bonus, inheritance, investment gains), they tend to agonize over:
- Prepay the mortgage: save on interest, become debt-free sooner
- Invest instead: if investment return > mortgage rate, it pays off more
This is a classic opportunity-cost problem, and mathematically you can compare it cleanly.
Core formula
The decision comes down to three numbers:
- Mortgage rate (currently around 1.8%–2.5%)
- Expected investment return (long-term equity market ≈ 6%–8%)
- Your risk tolerance
If investment return > mortgage rate, not prepaying beats prepaying (mathematically).
Concrete numbers
Assume you have NT$1M extra, remaining mortgage NT$5M, rate 2%, 20 years left.
Option A: Prepay NT$1M
- New principal: NT$4M
- Remaining 20-year interest: drops from NT$1.08M to NT$870K
- Save NT$210K in interest
- Monthly payment: from NT$25,300 down to NT$20,200 (NT$5,100 less per month)
Option B: Invest instead (assume 6% annualized)
- NT$1M grows over 20 years to: 1M × (1+0.06)^20 ≈ NT$3.21M
- Meanwhile, the mortgage continues normally, interest paid NT$1.08M
Net worth comparison (20 years later):
- A: saved interest NT$210K + no investment growth
- B: investment gain NT$2.21M (3.21M − 1M) − extra interest paid NT$210K = net gain NT$2M
Investing beats prepaying by about NT$1.79M.
But math isn't everything
1. Investment returns are not guaranteed
6% is a long-term historical average, not an annual guarantee. Short-term could be a 20–30% loss. If the market crashes right when you need cash and you're forced to sell, you lock in a loss.
Your mortgage rate is certain (in the short term at least), and the savings are real.
2. Psychological weight
The sense of debt freedom can't be quantified mathematically. Some people have mortgage stress affect their sleep, work, and relationships — these costs matter.
3. Liquidity
- Invested in the stock market: can sell anytime, but may be at a loss
- Paid into mortgage: money is "locked in" the house; pulling it back out (second mortgage, home equity refinance) takes time and hassle
4. Tax impact
- Investment gains: Taiwan stock capital gains are tax-free; dividends are taxed (see the dividend tax practical guide)
- Mortgage interest: itemized deductible (self-occupied, cap NT$300K/yr/household)
After deducting mortgage interest, your effective rate may be lower. E.g., rate 2%, marginal 20% bracket → effective 1.6%.
Decision framework
Prepay if
- Mortgage rate is high (> 3%)
- You're risk-averse, mentally burdened
- Approaching retirement, want debt at zero
- Little investment experience, distrust the market
- You already have a solid emergency fund + insurance
Keep investing if
- Mortgage rate is low (below 2.5%)
- You have a consistent investment discipline (long-term ETF holder)
- Stable income (cash flow can absorb shocks)
- Young (20+ year investment horizon)
- Emergency fund already built
Middle path: partial prepay + partial investing
The most common approach in practice:
- 60% invest (long-term growth)
- 40% prepay (reduce pressure)
- Or another ratio, based on your risk profile
This balances math-optimal against psychological safety.
Practical notes
1. Prepayment penalty
Most banks charge a prepayment penalty during the first 2–3 years (usually 0.5%–2% of principal). After that, no penalty.
At application, check the "early repayment penalty" clause carefully.
2. Shorten the term vs lower the monthly payment
Prepayment has two possible effects:
- Shorten the term: payment stays the same, term gets shorter → more interest saved
- Lower the payment: term stays the same, payment drops → looser cash flow
Shortening the term saves more interest, but lowering the payment is more useful for those with tight cash flow.
3. Keep enough emergency fund
Before prepaying, make sure you have 6 months of living expenses in reserve. Dumping all your cash into the mortgage and then losing your job is a disaster.
See the Emergency Fund Calculator.
4. Pay off higher-rate debt first
Before prepaying the mortgage, pay off any higher-rate debt:
- Credit card revolving (15%) → absolutely first
- Personal loans (7%–10%) → prioritize
- Car loans (3%–5%) → evaluate alongside mortgage
- Mortgage (2%) → last to consider
Tool support
Use the Mortgage Calculator to model different principal balances and compare prepayment amounts.
Combine with the Lump-Sum vs DCA Calculator to see cumulative investment returns.
A quantified decision rule
If you want a simple rule:
Investment return > mortgage rate × 1.5: only then pick investing.
E.g., mortgage 2% → need expected investment return above 3% to justify investing (factoring in risk premium).
The 1.5x buffer is compensation for risk uncertainty.
Official sources
- Central Bank (中央銀行) — central bank rate policy and trends
- eTax Portal (財政部稅務入口網) — mortgage interest itemized deduction rules
- Financial Supervisory Commission (金管會) — banking regulation, credit controls
Disclaimer
This is a general decision framework, not investment advice. Real choices involve individual financial circumstances, risk preferences, and tax situations; evaluate independently or consult a qualified professional.