If you have extra cash, should you pay off your loan? The standard answer is ‘no’ if the extra cash can earn a higher return then your cost of interest of your debt. Wilfred’s answer is that it depends.

First, the debt (such as mortgage loan) is a ‘risk-free’ liability. In financial jargon, the word ‘risk-free’ refers to low volatility. When you borrow money from a bank, the debt level does not suddenly ‘drop’ like a stock market. In fact, if there is no repayment, the debt level increases steadily like a stock market bull run. Unfortunately, such ‘risk-free’ behavior of debt is not good for the borrower but excellent for the lender.

Second, the required investment for the extra cash is never going to be risk free. Mortgage loans’ interest rate is slightly higher than saving rate. So it is not possible to get a higher return by putting …