Home Loan(Housing Loan)-Prepay? or Not to prepay? Explained
Housing Loan(Home loan) is quite common now to buy a house. But after taking house loan, a question arises prepay the loan? or do not prepay the loan?
Why We take home loan?…
Living in Own House is a big dream for most of us. But very few of us has money to buy the house.
Therefore, to fulfill our dream of living in own house, we will go for home loans.
E.M.I will be based on the loan amount taken and the term of the loan.
Sometimes this E.M.I tenure is as higher as 360 months(some banks providing).
Why you want to pre-close the loan?…
Once you bought the house with a housing loan, E.M.I has to be paid every month until the entire loan amount is repaid to the bank.
But some people do not have loans at all or some of your relatives or friends will tell you that they bought the house without any housing loan or they have cleared their housing loan quickly.
In any one of the said above, you will try to prepay loan as early as possible from the surplus left in your income after household expenses.
Is it beneficial prepaying Home Loan?…
Regular readers of my blog know that I have created some calculators, for investments etc. But creating a calculator for this home loan prepay is not easy(it needs a lot of data inputs).
Sometimes it is better to follow the sense, not the calculator.
You are planning to prepay this loan means that you are not going to invest for your other goals like child higher education, retirement etc until you clear the loan.
In some of the articles, I already told investing a higher percentage in equity for your long term goals is a good thing to do to get more corpus with lesser investment.
But if you delay your investment for the above-said goals till your prepay your home loan, then your long term goal will become a short term or medium term goal when you are about to start your investment for these goals.
In addition, for short term and medium term goals you should not take the same kind of risk in an investment like in long term goals.
As you cannot take higher risk, you are forced to invest in low-risk products where you will get less return( as the risk in investment is low).
What will be the best option to prepay the home loan?…
You will get income tax benefits for interest part and for principal from the E.M.I. Hence it is advisable to continue your E.M.I as normal for entire loan tenure.
At the same time, try to start a systematic investment plan(sip) in Balance mutual fund(aggressive).
Sip amount must be around 10% of monthly E.M.I and the sip term must be equal to your loan term.
If you do as I wrote above, You will accumulate approximately an amount equal to the total interest that you are paying in entire loan term.
In addition, do not forget to invest your surplus money to invest for other goals retirement, child higher education based on your risk tolerance and financial situation.
If you are not having that expertise in planning your savings for your financial goal, then a Sebi Registered Investment Adviser will help you.
Read how to calculate the xirr-in mutual funds, real estate, stocks etc. Click here to read.
Also, read life insurance required under the need-based method. Click here to read.
Also, read why real estate is a bad investment?. Click here to read.