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Should you repay your Home loan or Invest money?

Have you purchased your home through a home loan? If yes, then you are not alone. The skyrocketing prices of properties have compelled home buyers to take a loan to fulfill their dream of living in a self-bought home. It’s rare to find a homeowner who purchased a property without any loan, and it’s also rare to find people who don’t want to get rid of their loan as soon as possible.

Take a look at the numbers.

Suppose you have purchased a home of 50 lakhs on 8% interest for the tenure of 20 years. Your EMI will be Rs. 35,000 per month. Let’s understand the concept with below table:

Loan Taken

Re-pay amount after 4 years (approx)

Re-payment amount if invested in mutual funds (MF) for 16 years with 15% return

Rs. 50 lakhs

Rs. 40 lakh

Rs. 3.75cr

The above eye-opening table clearly reveals the huge amount which you can gain if invested in Mutual Funds. Hence, investing the lump sum amount in mutual funds is always advisable instead of re-paying your loan. You can continue paying the EMI for 20 years, and in the end, your invested amount in mutual funds will give you a huge total which will be much more than your re-pay amount. Also, you can save on your taxes of 1.50 lakh/yr Home Loan on interest paid.

People always prefer to repay the loan before reaching half the tenure duration. However, don’t be in a hurry to pre-pay your home loan. There are a few things which you need to consider.

What is your remaining tenure?

The structure of EMI is more beneficial for the bank rather than the homeowners. Your EMI amount will remain the same for the next 10-11 years. Your principal repayment will remain less in the first half of the tenure.

So, if you want to pre-pay your loan amount, then it’s wise to do this at the initial stage i.e.5-7 years to save a lot.

In the latter stage, you will pay 70% of the interest cost in the first 10-11 years, and you will save significantly less by repaying late.

If you have a low-interest rate home loan, you can invest that money for the same number of years as your EMI instead of late pre-payment.

Go with the investment plan, giving you a higher return rate than that home loan interest rate. For instance, for 9-10 years, you can put your money in mutual funds for higher returns than the home loan rate. This will be a smart way to save instead of repaying to the bank.

Do you have a lump sum, or are you saving to repay?

Suppose you are not comfortable with the big loan, as it cuts corners on other expenses. In that case, thinking about pre-payment can be an emotional decision rather than a logical one. In such a condition, you can do what your heart says.

If you got a bonus and your daily cash flow is going well without that lump sum, you can continue repaying your home loan and invest that amount inappropriate plans to earn more than paying for a home loan.

Conclusion

Pre-paying your home loan may be intuitive, but investing that amount will be better utilization of available funds. Ensure that your monthly cash flow is not interfering with the EMI before you think to save money for pre-payment.

 

 

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