Should I invest or prepay my home loan?

Hey there! Deciding whether to invest or prepay your home loan can be a bit tricky, but I’m here to break it down for you in simple terms.

First, let’s understand the two options. Prepaying your home loan means paying off a part of your loan early, which reduces your interest burden and can shorten the loan tenure. On the other hand, investing means putting your extra money into something like stocks, mutual funds, or fixed deposits, hoping to earn returns over time. The choice depends on a few key factors. Compare the interest rate on your home loan with the potential returns from an investment. If your loan interest rate is high (say, 8-9%), and the investment return is lower or uncertain, prepaying the loan might save you more money in the long run. However, if you can earn a higher return (like 10-12% from a good mutual fund) than your loan rate, investing could be smarter. Also, consider your financial goals and risk tolerance—prepaying is safe and guaranteed, while investments carry some risk. Don’t forget tax benefits too; home loan interest offers deductions under Section 24 of the Income Tax Act in India, which you might lose if you prepay fully.

In conclusion, there’s no one-size-fits-all answer. If your loan rate is high and you’re risk-averse, lean towards prepaying. If you’re confident in getting better returns and can handle some risk, investing might be the way to go. Just make sure to keep an emergency fund aside before deciding. Interesting fact: Did you know that prepaying even a small amount early in your loan tenure can significantly reduce the total interest you pay over the years due to the way interest is calculated on reducing balance?