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Nov 1
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home loan

The Surprising Response for Home Loan Prepayment or New Investments

The home loan customers often face the dilemma of prepaying the home loan or investing the money in better options. The home loan EMIs often trouble the customers and some find it better to prepay the loan and breathe in peace. However, the financial trends are changing and people are looking for option with interest returns for long term.

One has the option of investing money in SIP or Mutual funds, which may definitely fetch better returns for the long run. Every home loan taker first assesses the present repaying capability and then takes the loan. After few years the income increases and extra money, through increased salary (including bonus / incentives) is also available for use. In this condition he or she thinks whether to prepay the outstanding home loan or go for some investment yielding higher returns with the option of short term and long term.

There are some basic principles that people generally follow. Even the financial advisors stress the need to repay the previous loans first. It is generally suggested to clear off the loans before one proceeds with the saving plans. The logic is simple. The rate of interest which one gets on saving is generally less than what one pays on the loans. But this phenomenon is true only for short time general savings. Credit card loans, consumer loans and even bigger loans like car loans must ideally be considered for prepayment than utilizing the money in the saving plans.

This basic principle although needs to be analyzed with a critical outlook. Time is now changing and people are ready to put money in better investment plans. In the long-run investments in the mutual funds generate a better yield than a person would pay on home loans. In a ten years’ duration an investment in SIP plan has shown a higher rate of return. These plans showcase a realistic saving plan for those who are repaying a home loan.

Experts state that there are many financial advantages of not prepaying the home loan. One gets tax rebates and concessions if one is using a home loan. Interest paid on home loan (upto Rs. 2 Lakhs) carry tax deduction and the personal income tax is lower on account of this adjustment. While there are few long term savings options (like Equity MF, PPF etc.) where there is no tax on the yield or the tax rate is lower. Also there is more liquidity available for you. No one can predict future and upcoming needs. One should always have some minimum savings for future uncertainties.

But if you have a good amount of saving which can be liquidated and is available for use, you can go ahead with prepaying the loan. The only consideration to be made is that there should not be any big financial expense in the near future. Once the saving is utilized in settling the loan it takes time to regenerate liquid cash for immediate use.

It is generally advisable to clear off the loans before venturing on a saving plan. However one should maintain an emergency saving amount that is accessible and is kept for future needs.

What is the clear answer to the puzzle? The answer is if there is excess amount available at use and can be put for long term investment; then go for long term savings in mutual funds and SIPs. If you do not anticipate any immediate financial expense in near future and have a moderate saving amount then go for prepaying the loan.       

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