Should you repay your home loan early or invest your surplus cash?

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When the stock markets are performing well and interest rates are low, many borrowers wonder whether they should invest their surplus money or prepay their housing loans

To make this decision, you will need to assess your current situation and determine whether it makes sense for you to prepay or continue using the loan.

Since there is no single answer to the question, and the opinions of experts differ, this will be your choice at your own discretion.

If you’re strictly looking at the numbers, there is a rule of thumb that suggests that if you can get a better tax return than the current home loan interest rate, don’t pay upfront. Use that money to invest instead.

For example, housing loans from banks currently can be at 7-7.5% per annum. Most planners take 9-10% of the after-tax returns for stocks in the long run. Based on the rule of thumb, starting a systematic investment plan for the long term turns out to be the best option, since the return on investment is about two percentage points higher than the interest rate on a home loan.

“No one can predict the return on the stock market. There is a possibility that current stock valuations will be overestimated and yields may remain weak over the next few years. In this case, the borrower may think it is a better option to prepay than invest in stocks, “said Arnav Pandya, founder of Moneyeduschool, a financial literacy initiative in Ahmedabad. Therefore, do not use the rule of thumb.

Before you decide to make a home loan prepayment, make sure that your basic expenses are covered. You must have a reserve fund to cover expenses for 6-12 months. In addition, adequate life and health insurance must be provided.

“The person should also check whether he or she is saving enough for his or her purposes. If people are lagging behind in achieving their goals, it is better to increase their monthly investment first, ”said Pandya.

The best strategy is to use the return on your investment to pay off your mortgage early, not a bonus or extra money you’ve accumulated from your income. “A person can use some of the profits to pay off a home loan early instead of using capital. Whether an individual uses 10% or 50% of the profit depends entirely on him. The idea is not to use capital, ”said Kartik. Javery, Director of Transcend Consultants.

Some experts believe that an individual should not make an advance payment if the tax credits on a home loan constitute a significant portion of income and there is time to retire. Man gets up before 1.5 million tax credits for the bulk of the home loan and up to 2 lakhs per percentage. “If tax savings make up a significant portion of your income, it’s better not to pay in advance. The additional cash annually will provide liquidity, ”said Malhar Majumder, a mutual fund distributor and Positive Vibes partner based in Kolkata.

He added: “It would be advisable to make an advance payment only when the pension is approaching and the person wants to fulfill all obligations.”

Also, before making a decision, assess if you have any significant expenses in a few months. According to financial planners, people often prepay their loans with extra money and then take out a loan or use a credit card to cover significant expenses after a few months.

(Have questions about personal finance? Send them to mintmoney@livemint.com and get answers from industry experts)

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