Purchasing a home is a significant milestone for many individuals in India, often financed through home loans. While home loans provide a convenient way to fulfil the dream of owning a house, the long tenure and interest payments can be burdensome. With a well-planned investment strategy, it is possible to accelerate the repayment of your home loan.
However, paying off a home loan ahead of schedule requires careful planning and a disciplined investment approach. By implementing effective investment strategies such as increasing EMI payments, investing in fixed deposits, mutual funds, recurring deposits, PPF, direct stock investments, and utilising windfalls, you can expedite the repayment process. Let’s discuss effective investment strategies that can help you pay off your home loan ahead of schedule.
Increase EMI payments
One of the simplest and most effective startegies is to increase your Equated Monthly Instalment (EMI) payments. By paying more than the minimum required EMI each month, you can reduce the principal amount and, consequently, the interest paid over the loan tenure. Evaluate your financial capabilities and consider increasing your EMI payments to expedite the loan repayment process.
“If you have limited liquidity but still want to pre-pay, you could simply increase your EMI by a small margin of a few thousand rupees. This acts as micro pre-payment. It also keeps your savings free for investment,” says Adhil Shetty, CEO, Bankbazaar. “Investing strengthens your finances. The micro pre-payments accelerate your debt payment. This way, you can focus on both investing and pre-paying. This is better than opting only for one.”
Invest in fixed deposits
Consider investing in fixed deposits (FDs) to accumulate funds for making lump sum prepayments towards your home loan. FDs offer a safe and predictable return on investment. Choose FDs with shorter tenures to ensure the funds mature around the time you plan to make prepayments. This way, you can utilise the interest earned to reduce the outstanding loan amount.
Systematic investment plans for mutual funds
Investing in mutual funds through Systematic Investment Plans (SIPs) is another viable strategy. SIPs allow you to invest a fixed amount regularly in mutual funds. Opt for equity-oriented mutual funds that have historically provided higher returns over the long term. The accumulated corpus can then be used to make prepayments towards your home loan, thereby reducing the principal and interest burden.
Public Provident Fund
PPF is a government-backed long-term investment scheme that offers attractive interest rates and tax benefits. Consider opening a PPF account and contribute the maximum allowable amount each year. The maturity amount can be utilised to make substantial prepayments towards your home loan, significantly reducing the interest burden.
Direct stock investments
Investing in stocks requires thorough research and market knowledge, but it can yield substantial returns. Identify fundamentally strong companies and invest in their shares with a long-term perspective. If you achieve significant gains, consider using a portion of the profits to make prepayments towards your home loan. However, exercise caution as stock market investments carry inherent risks.
Utilise bonuses and windfalls
Any bonuses, windfalls, or unexpected monetary gains you receive should be utilised strategically. Instead of splurging, allocate a significant portion towards prepayments on your home loan. These lump sum payments can substantially reduce the principal amount, resulting in substantial interest savings over the loan tenure.
“If your liabilities are big, you should focus on loan payments. High-interest loans such as home loans should be repaid on priority. But consider the pros and cons,” Shetty adds.
However, it is crucial to evaluate your risk tolerance, financial goals, and consult with a financial advisor before making any investment decisions. With the right investment strategy and prudent financial management, you can achieve the goal of early repayment of your home loan, providing you with greater financial freedom.