Hi Kkel Viin, thank you for your question and so sorry for the late reply. In every financial decision, there are different perspectives you can look from, so it is really not a straightforward answer.
From the investment perspective, it is really simple. If your loan interest rate is lower than your OA interest of 2.5% p.a., then it make sense to drag the loan. If you have cash sitting in the bank account doing nothing and earning less than your mortgage rate, you might want to use your cash to pay off your loan.
But things get more complicated when you start to also consider the financial planning aspect of the equation. How is your total debt servicing ratio (defined as your total monthly debt repayment/Grossincome)? Is it higher than 40% of your gross income? How is your debt to asset ratio (defined as your total liabilities/total asset)? Is it higher than 50%? These are some of the ratios you can use (there are of course more). What I mean is that if you are too much heavy laden with debt, you might want to pay down your debts even if it does not make investment sense because if you are financially unhealthy, your ability to invest drops.
Things get even more complicated when you overlay your financial decisions with your relationship with money, your history with money. One way to look at this is, what is your feelings about debt? Do you feel comfortable? does having debt make you worried and cause you to lose sleep. Does it go against your values? Do you have a situation in your life or in your family life that debt was a major cause of a family breakdown? You get my drfit. Sometimes, there are things in life that cannot be explained away by investment and financial principles.
My conviction is that money is not a goal, It is an enabler. As such, even though following solid investment/financial planning principles make sense logically, but if it does not make you comfotable, if it goes against your value system. If it causes you to lose your health, then perhaps you need to reconsider how to better balance your decisions. It is about managing the tension between investments, financial planning and your relationship with money.
I hope this helps.
Hi Kkel Viin, thank you for your question and so sorry for the late reply. In every financial decision, there are different perspectives you can look from, so it is really not a straightforward answer.
From the investment perspective, it is really simple. If your loan interest rate is lower than your OA interest of 2.5% p.a., then it make sense to drag the loan. If you have cash sitting in the bank account doing nothing and earning less than your mortgage rate, you might want to use your cash to pay off your loan.
But things get more complicated when you start to also consider the financial planning aspect of the equation. How is your total debt servicing ratio (defined as your total monthly debt repayment/Grossincome)? Is it higher than 40% of your gross income? How is your debt to asset ratio (defined as your total liabilities/total asset)? Is it higher than 50%? These are some of the ratios you can use (there are of course more). What I mean is that if you are too much heavy laden with debt, you might want to pay down your debts even if it does not make investment sense because if you are financially unhealthy, your ability to invest drops.
Things get even more complicated when you overlay your financial decisions with your relationship with money, your history with money. One way to look at this is, what is your feelings about debt? Do you feel comfortable? does having debt make you worried and cause you to lose sleep. Does it go against your values? Do you have a situation in your life or in your family life that debt was a major cause of a family breakdown? You get my drfit. Sometimes, there are things in life that cannot be explained away by investment and financial principles.
My conviction is that money is not a goal, It is an enabler. As such, even though following solid investment/financial planning principles make sense logically, but if it does not make you comfotable, if it goes against your value system. If it causes you to lose your health, then perhaps you need to reconsider how to better balance your decisions. It is about managing the tension between investments, financial planning and your relationship with money.
I hope this helps.