Interesting question… we generally accumulate some surplus and face the dilemma that what to do with the surplus funds – Should I prepay the home loan or should I invest the money somewhere.
what is your opinion on this? Most of us would choose to re-payment of the home loan over equity investment. Most of us are afraid of losing our money in the share market because we know only little about it. And whatever we know is that share market is very risky. Logically, a home loan is the cheapest loan available and equity is the highest return gainer.
Before going into detail let’s look at some facts.
1.) If you look at the long-term returns of some Top Equity mutual funds over a 1, 3, 5, & 10 year periods, you will find that they have outperformed any other asset class available.
3.) Around 80% is home loans are prepaid before their term.
4.) You can claim your home loan interest under income tax and can avail rebate of around 60k/ year.
As mentioned above around 80% of the home loan is prepaid, that means they forgo the tax exemption that they should have got, also miss an opportunity to invest that money into equity markets and got almost double the returns.
So what is the takeaway?
- Plan your home loan in such a way that you will get tax exemption under the income tax law.
- Pre-payment should not be your only objective in life.
- Let there be some liabilities on you, which keeps you going.
- Invest in long-term equity for higher returns.
- Don’t invest in real estate, they are a dead investment. At least for next 10 years, it’s not going to get you good returns.
- Consider the opportunity cost by comparing pre-payment with equity investment.
- Don’t be emotional, be logical.
For some, debt is a lot of sort of a hanging sword and that they wish to induce away with it as early as attainable. However, one ought to compare the tax advantages and effective rate when taxes of pre-payment with the returns of investment in equity theme you would like to speculate. If the advantages of pre-payment outweigh that of the returns from the investment firm. opt for a pre-payment, else continue with regular EMI.