Home loan: should you repay it or invest if you have a lump sum?
Since buying a home requires a large amount of money, very few people can buy one with the full down payment, and most homebuyers need to take out a home loan. There are also some advantages to buying a house by taking out a home loan – buyers save money on rent by switching from rented accommodation to owner accommodation and there are also tax advantages on the interest paid on the property. a mortgage and on the repayment of the principal. .
Home loans are generally less expensive than other loans, and repayment terms typically vary from 15 to 20 years. Some financial institutions even offer home loans with a repayment term of 30 years.
Even if mortgage interest rates are lower, the longer the repayment term, the higher the total amount of interest paid will be, even if the amount of the equivalent monthly payment (EMI) will be lower.
For banks and financial institutions, home loans provide long-term stable income for 15 to 30 years.
However, during the long repayment period, if a borrower receives a lump sum or their regular income increases significantly, should the extra money be used to pay off the current home loan or should it be invested elsewhere to generate income? the wealth ?
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The decision to repay or invest should be made on a case-by-case basis.
When to repay
The decision to repay the entire loan amount or part of it can be crucial in the following circumstances.
If there is uncertainty about future income due to a lack of stability in the career, it is best to reduce future debts by paying off the mortgage early whenever an opportunity arises.
High EMI amount
In case the amount of EMI is very high relative to monthly income – for example more than 40-50 percent of salary / income – it is better to use a lump sum to reimburse part of it to reduce the amount of the EMI.
When to invest
The decision to invest can be made on the decision to repay based on the following factors.
Low interest rate
As the interest rates on home loans are generally lower than those on most other loans, there are opportunities to generate a higher return on your investment.
Since mortgage terms are longer than 15 years, a borrower has the opportunity to invest in long-term instruments like equity and generate a much higher rate of return than the interest rate on a loan. immovable.
Since there are tax benefits up to a limit on mortgage interest and principal repayment, it is better to continue with the repayment schedule to enjoy the benefits rather than paying off in a lump sum. In addition, a lump sum refund would exceed the tax benefit limit in the excess refund year and reduce the scope of future tax benefits.