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What are the relevant cash flows to consider in this decision? For example, do you consider the tax implications and if so, then how?
The relevant cash flows are given below. The sign of the cash flow is indicated in brackets.
Repayment of extra principle = Negative
Interest savings on mortgage due to additional principle repayment = Positive
Reduction in tax benefits on interest paid on mortgage = Negative
Opportunity cost (return lost on investment) = Negative
Tax payments on income earned from investments under investment option = Positive
OUTPUT
Loan Balance 135,000...
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If it is after-tax it will be more available to you, but every 12 months you will be forced to pay tax on your annual yield. This also assumes that you take the extra tax savings by NOT prepaying (prepaying lowers your deductible interest payments) and you put the tax savings into the investment as well...
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