Should you prepay your home loan or invest the money?
Feb 12, 2014
Source : The Economic Times

 

DELHI: The home loan EMI is divided into interest and principal repayment, and the proportion of each changes over the years as the interest component falls and the principal rises. So, if Kamat prepays the loan, he will find a large amount of principal still outstanding, while the interest would already have been paid, assuming full term. When a loan is paid in part, the EMI for the remaining period is reworked. However, this is also based on the assumption of a full-term repayment, where the interest is front-ended.

Kamat might find that repaying the loan will shrink his personal balance sheet since only the house will remain as an asset. If, on the other hand, he invests the money, his asset base will diversify and become bigger. Given the stability in the couple's income, Kamat should have no problem paying the EMI. If there is a risk, he will not need to sell the house, but can sell the investment to repay the loan as required.

Kamat should ensure that his investment does not grow at a rate lower than the one paid on the home loan interest. He should also ensure that the money is kept in shares, mutual funds or other instruments, which can be sold when required. The investment can appreciate over time and be available for other needs compared with the investment in house, which is not flexible and cannot be used as required.

 

 

 

                   

 

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