Is prepayment of your Home Loan a better option than investment?

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There are several reasons why an individual wants to borrow a Home Loan from the bank. A person might want to save the hassles of renting or he is seeking a long-term investment through the home. At the end of the repayments, he’ll have a valuable asset to his name. But the process of Home Loan is not an easy one and is not available for people with poor financial standings as a candidate’s financial condition is taken well into consideration before granting a Home Loan.

Home Loans are usually long term loans. The tenure of the loan is usually 20 years and can be extended up to 30 years as per the needs of the borrower. One thing which must be remembered is that the higher the tenure, higher will be the rate of interest charged on the Home Loan interest and vice-versa. Thus Home Loans should be repaid as early as possible in order to avoid high Home Loan interest rates. You can even opt for Home Loan balance transfer by switching banks. This will help you to save a decent amount of money in the long run just by taking the right decision.

When we talk about a Home Loan, one of the most important parts is the prepayment one. Suppose you received an annual bonus or have just received a bulk payment that was due to be paid to you since a long time. In such a case you are in the thought of whether to prepay the loan or whether to invest that amount in some other area. Investment can lead to higher profit while prepayment will reduce the entire stress that comes with monthly installments. These are the primary features of the two. Let us now understand which one is better – Prepayment or investment by going in detail.

There are few variables that you need to consider when you’re deciding between prepayment and investing the lump sum amount. There are goals that you need to meet and all the possibilities are to be thought of before making this decision. These variables are:

Psychology: One of the most important aspects of repayment of the loan is the psychology of a person. It differs from person to person. For some high loan amount is not a serious issue and they have faith in their abilities to repay the loan thus they encourage more loans whereas many are conservative and see Home Loan as a threat. Even if they secure a Home Loan, they wish to get rid of it as early as possible. Thus these people prefer prepayment over investment.

Tax benefits: There are various tax benefits attached to the Home Loan offers. Although investment is attractive, investment in the presence of outstanding loans is a sensible choice to many. They are looking for tax benefits and thus they divert their lump sum received in some other investment and continue to avail tax benefits. Thus they prefer to stick with the payment of monthly EMIs.

Return on investment: Every investment made is with a view to obtain a better return on investment. A profit is what everyone is looking for. When you look forward to prepaying your loan there are several factors that you need to consider. If the post-tax return on investment is higher than you should opt for investment over prepayment. This is the general thumb rule.

These are the three variables that need to be considered carefully. Give a considerable thought to it when you think to prepay a Home Loan. Apart from these variables, Home Loan Tax Benefits should be the primary focus in order to make the most out of it. If it’s favorable then stick to it, if not then switch to an investment.

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