Home loans are usually available at the cheapest rates compared to other options like personal loans, home loans and others. Currently, home loans are available at rates as low as 7-9% per annum or less, but personal loans can be between 10-20% depending on your credit score, income, and occupation. But now the cycle will reverse with high inflation in the spotlight. Indeed, the repo rate was recently hiked by 0.40% by the Reserve Bank of India (RBI) during the off-cycle monetary policy meeting, where it was made clear that rates are expected to rise further without easing. inflation. rates. In such a scenario, is it better to prepay your mortgage or invest your money?
Long-term loans like home loans allow you to make early repayments. By prepaying a certain percentage of your outstanding amount each year, you can significantly reduce your total expenses. However, while deciding, it is also important to note that there is a deduction on repayment of home loan interest of up to Rs 2 lakh under Section 24(b) of the Home Loan Act. income tax. There is also a deduction of Rs1.5 lakh under Section 80C of the Income Tax Act. However, since for most people the deduction limit of 1.5 lakh under Section 80C of the Income Tax Act is exhausted with compulsory PF contribution, premium insurance, children’s school fees and the like, very few people are able to claim a deduction on the principal repayment of a home loan under 80C.
There are pros and cons on both sides and having a liability is a big responsibility. The strategy of investing in stocks, as it has the potential to generate higher returns and to continue with the regular EMI, can work well until the difference between the investment returns and the interest rate home loan is reasonable.
“A few factors like interest rate, outstanding loan amount, remaining term of the loan, and your ability to save each month after meeting all expenses can help you decide if you should use the money. saved to prepay the home loan or invest the surplus.When home loan interest rates are low, investing might be a better option, but you should revisit this strategy when the interest rate rises. tax is an added benefit, but you can always work out a plan to reduce the mortgage outstanding as it can help you save tax and at the same time reduce your liability,” says Harshad Chetanwala of MyWeathGrowth.Com, a Mumbai-based financial planning company.
“Assuming someone is in the 31.2% tax bracket (cess included), on a loan of Rs 25 lakh, if the net outflow is Rs 1.2 lakh, that means the cost Effectiveness of the loan is less than 5%. And, if the home loan is higher and the interest expense is more than Rs 2 lakh, a borrower cannot claim a deduction on the entire interest paid. There are additional deductions under Section 80EEA of the Act, but given the eligibility criteria, most people cannot take advantage of them,” says Rishad Manekia, Founder and Managing Director of Kairos Capital.
Manekia adds: “Comparing the prepayment of a house loan to an equity investment is not an apple to apple comparison. An investor should take into account several considerations, starting with the purpose of the investment and how it fits into a person’s financial goals, including their overall financial plan, while taking into account the needs of liquidity of the investment, time and cost of maintaining the asset. and finally the returns on risk taken and how it compares to other asset classes.
“Most people who take out a home loan try to pay off their loan in 8 to 10 years. It’s a good strategy. It also ensures peace of mind when you become liability free and also have your entire monthly income to invest from this point on,” says Chetanwala.
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