- Extra Rs 20,000 monthly can be used to prepay home loan or invest in SIPs
- Prepaying reduces total interest and shortens loan tenure, easing financial burden
- SIP returns may exceed home loan interest but are market-linked and not guaranteed
If you have an extra Rs 20,000 every month, you may wonder whether it's better to invest the money or use it to prepay your home loan. The right choice depends on your loan interest rate, investment returns and financial goals.
When you prepay your home loan, the total interest you pay over the loan tenure reduces. Even small extra payments each month can reduce your outstanding loan balance. It not only makes you debt-free sooner but also reduces your financial burden.
So, when you can invest the extra Rs 20,000 every month in options like SIPs, you may be able to earn better returns than the interest you're paying on your home loan. But mutual funds are linked to market interests, and the returns are never guaranteed.
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For a Rs 1 crore home loan at 6.5% interest for 20 years, the EMI comes to Rs 74,557. The total interest paid over the full tenure is around Rs 78.93 lakh.
Now, if you have already been paying this EMI for 5 years, you would have paid about Rs 44.73 lakh in total EMIs so far. If you decide to increase your EMI by Rs 20,000, your new EMI becomes Rs 94,557. With this, you can end your EMIs early and save more.
But before you prepay your home loan, first check your future expenses. You may need money for things like your child's education, marriage, medical needs, or retirement.
Next, you should understand the tax benefits of a home loan. You can get a tax deduction on principal repayment up to Rs 1.5 lakh and on interest up to Rs 2 lakh. If you prepay the loan, these tax benefits may be reduced, so you should check if you are actually saving money or not.
You should also check if your bank charges any prepayment fees. Some banks charge a penalty for early repayment, but most floating-rate home loans do not have any prepayment charges. But before you go with the prepayment of a home loan, compare it with other investment options. Sometimes investing money can give better returns than the interest you are earning on the loan.
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