Should you invest your extra funds, or prepay your Home Loan?

Should you invest your extra funds, or prepay your Home Loan?

Tarun took a home loan in 2015 when his salary was Rs 75,000 a month. After calculating the home loan interest rate and the principal, his EMIs stood at Rs 26,000. He was comfortable paying the EMI each month. But now he’s had a couple of promotions and brings home an income of Rs 1.2 lacs each month. He is now confused about whether to prepay his home loan or to make some investments. Let us find out what he should ideally do.

Situation 1 – clear the home loan

If you have a lot of added earnings or have some extra cash that you earned or inherited (work bonus, family wealth, etc), you could clear the home loan completely or prepay a large chunk of it. The home loan is a blend of your principal and interest. Depending on the home loan interest rate, you end up paying a lot more on the overall loan because of the interest paid over the years. The faster you close the loan, the lower the interest you pay. This is a situation that many people find themselves in and so clear the loan off when they can.

Situation 2 – continue with the tax benefits

Tax saving is an important task for everyone. You need to save a certain amount of tax money either via loan repayments or investments. If you rely solely on your home loans EMIs to save tax, then do not prepay your home loan. You will lose the tax benefits and end up making losses in the long run. If however, you can make investments that offer equal amounts of tax rebates, close your home loans and focus on the investments. The goal should be to save tax, so do the math and see which option is better suited for you. Do factor in the risk component associated with investments and then proceed accordingly.

Situation 3 – save money

Did you exhaust all your life’s savings when paying your home loans down payment? If yes, then you must positively look to save up and build a corpus. Some savings and needs in life and you need to make provisions for uncertain events. You need to have some spare cash for medical emergencies, financial hardships, etc. If you have no money in your bank, look to make some simple investments to help your savings grow. You can continue with the home loans as it is for now. Once you have saved a comfortable amount of money, you could then consider prepaying your home loans, but for now, do not do it.

The final word

Prepay your home loans only when you have other tax-saving instruments available to you. Also, keep an eye on your savings. If your savings and low or non-existent, build up a corpus with your excess earnings. Be wise with your money and you will make many profits in the long run. The home loans interest rates matter so look to get a good home loan in the first place which will help to make your EMIs affordable.

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