Home Loan: Should you repay it or invest if you have lump sum money?

By: |
September 18, 2021 5:36 PM

Home buyers save money on rent by moving from a rented to own home and there are also income tax benefits on the interest paid on a home loan and on the principal repayment as well.

home loan, home loan interest, repayment of home loan, EMI amount, home loan EMI, investment, return on investment, long-term investment, tax benefitsHome loans are generally cheaper than other loans and repayment periods mostly vary from 15 to 20 years.

As buying a home requires a large amount of money, very few people can buy one with the entire down payment, and most home buyers need to take out a home loan. There are also some advantages of buying a home by taking a home loan – buyers save money on rent by moving from a rented to own home and there are also income tax benefits on the interest paid on a home loan and on the principal repayment as well.

Home loans are generally cheaper than other loans and repayment periods mostly vary from 15 to 20 years. Some financial institutions are even offering home loans for a repayment period of 30 years.

Even if the rates of interest on home loans are lower, the longer the repayment period, the higher will be the total interest payment, even as the amount of equated monthly installment (EMI) will be lower.

For banks and financial institutions, home loans ensure long-term stable income for 15 to 30 years.

However, during the long repayment period, if a borrower gets some lump sum money or his/her regular income rises substantially, should the extra money be used to repay the ongoing home loan or should it be invested elsewhere to generate wealth?

Buying a house Vs Staying on rent: Which would benefit you financially under the new tax regime?

The decision to repay or invest should be taken on a case to case basis.

When to repay

The decision to repay the entire loan amount or a part of it may be crucial in the following circumstances.

Unstable Career

In case there is uncertainty in future earnings due to lack of stability in career, it’s better to reduce future liabilities by repaying home loan early whenever there is an opportunity.

High EMI amount

In case the amount of EMI is very high compared to monthly income – e.g. over 40-50 per cent of salary/income – it’s better to use lump sum money to repay a part of it to reduce the EMI amount.

When to invest

The decision to invest may be taken over the decision to repay on the basis of following factors.

Low interest rate

As interest rates on home loans are generally lower than most other loans, there are scopes to generate higher return through investment.

Long tenure

As the tenures of home loans are over 15 years, a borrower gets a chance to invest in long-term instruments like equity and generate a much higher rate of return compared to the rate of interest on a home loan.

Tax benefits

As there are tax benefits up to a limit on home loan interest and principal repayment, it’s better to continue with the repayment schedule to enjoy the benefits instead of repaying in lump sum. Moreover, repaying in lump sum would exceed the limit of tax benefit in the year of excess repayment and curtail the scope of future tax benefits.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Online property search surpassed its historic peak in September, Delhi-NCR tops the chart
25 things to know before going to a lender for a home loan
3Mutual Fund Investment: Should Contra Funds be part of your investment portfolio?