If the home loan borrower has surplus money, then it is very important to understand whether investing it in other places is more beneficial or not. If you get better returns than the interest rate, then prepayment should be avoided.
Home loan should have 6-12 EMI cover under emergency fund.
Prepay Home Loan: Home loan is the longest lasting loan. When you deposit the EMI for the initial few years, most of the EMI gets deposited as interest only. A very small part is meant to reduce the principal amount. After a few years, the principal starts decreasing rapidly. In such a situation, the question comes in the mind of many people that why not reduce the principal amount and lighten the loan burden with the help of advance payment.
If you also have this question in your mind, then it is important to know that your decision is financially sound. If the home loan borrower has surplus money, then it is very important to understand whether investing it in other places is more beneficial or not. While there is no thumb rule, financial experts say that prepayment should be avoided if you can get better returns than the home loan interest rate on surplus funds. Such borrowers should focus on investing in the long term with the help of SIP.
Invest if you get better returns than the interest rate
Usually the interest rate of home loan is 7-8 per cent. In such a situation, if after tax, the return on surplus money can be higher than that, then such borrowers should avoid prepayment. If one invests in the stock market, it is not necessary that he will give very good returns in the long term. In such a situation, if he invests in the equity market, then he will have to constantly monitor his portfolio and make profit booking from time to time.
Make an emergency fund of 6-12 EMIs
Investment experts also say that there should be 6-12 EMI cover of home loan under emergency fund. Apart from this, good cover of life insurance and health insurance is also necessary. Experts also say that the surplus money should be invested and prepayment will be more beneficial than the earnings from it.
There should be no effect on tax benefit
Some experts also believe that there are various tax benefits available on home loans. Under 80C, a deduction of Rs 1.5 lakh is available on the principal repayment. 2 lakh is available on interest repayment. In such a situation, it is also necessary to calculate that if you make a prepayment, then it does not have any effect on the tax benefit. If prepayment is taking effect then the surplus money can be used for futures.
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