There’s a popular proverb in Hebrew – “He who does not own a piece of land is not a full man”. Almost all Indians consider having a place of their own as one of the most important life goals. After all, it is one of the most elementary human needs. As purchasing a house needs a substantial sum of money, not everyone can buy a house with the entire down payment on their own, because of which most home buyers need to take a home loan. What’s more, when an individual takes a home loan to buy a residential property, then enjoy certain advantages such as income tax benefits towards the principal repayment on the home loan and the interest paid on a home loan.
Home loans are usually less expensive than other types of loan and the repayment periods for these loans typically varies from a span of fifteen years to twenty years. Some financial institutions or banks even offer home loans to buyer at a repayment period of thirty years. However, one must understand that even if the interest rates on home loans are less as compared to other loans, the longer the repayment period, the higher would-be, total interest paid towards a home loan, even if the EMI or equated monthly instalment is lower. However, during this long repayment period, if a borrower’s source of income substantially rises or if he receives a lumpsum sum of money, should the borrower use the extra cash to repay their home loan or should that lumpsum sum of money be used to invest in investment options that help to generate wealth over time? The decision to invest or repay should be taken according to different cases. Let’s understand these different scenarios:
When to repay?
One may decide to repay their home loan or a part of their home loan if one of the following circumstances are applied to them:
- High EMI amount
In case the borrower has a high EMI amount as compared to their monthly income, for instance if a borrower is paying more than 40% of their income towards home loan repayment, it might be a wise decision to use the lumpsum amount of money to pay a part of the home loan to decrease their EMI amount.
- Unstable career
In case a borrower has an unstable career and as a result there is an ambiguity in the future earnings, it might be a wise decision to decrease one’s liabilities by repaying their home loan as and when the opportunity arises.
When to invest?
One may decide to make a lumpsum investment rather than repaying the home loan if one of the following circumstances are applied to them:
- Long tenure
As a home loan has a long tenure of over 15 years, a borrower has an opportunity to invest in long-term investment options such as equities and equity-related securities to enjoy a higher rate of interest than the interest paid against home loans.
- Low interest rates
As home loans usually enjoy lower interest rates than other types of loans, there is high potential to generate higher rate of interest through investments.
- Tax benefits
A borrower enjoys certain tax benefits on principal repayment and home loan interest up to a certain extent.
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