Greetings,
There’s no straightforward answer to this question.
After all, there are multiple unknowns to do such calculations. And the outcome could change based on different borrower profile and details.
Still, let’s try to understand with an example.
Three years ago, Neil took a loan of Rs 1 crore for 25 years.
Now that he has surplus income, he is confused between two options.
1. Should he Increase the EMI and finish the loan early
2. Invest the surplus money in a mutual fund.
Let’s analyse the best option for him.
The First Option: Prepaying Loan
Assume his interest rate = 8.55%.
To reduce the tenure to 10 years, he increases EMI. By doing so, he pays off the loan in 13 years.
His monthly payment goes up to Rs 1,19,373 from the earlier Rs 80,860.
All this translates into a total savings of Rs 70.2 lakh.
The Second Option: Investing
Neil doesn’t increase the EMI.
Instead, he invests Rs 38,513 in an SIP for the remaining tenure of the loan.
When he finishes the loan, he will accumulate close to Rs 5 crore (assuming 12% returns).
Here’s the comparison of the two options.
No Big Impact Of Tax Deduction
Neil gets Rs 2 lakh yearly tax deduction for the interest portion of the home loan.
Assuming Neil is in the 30% tax slab, this could be income tax saving of up to Rs 60,000 a year.
It’s not significant when compared with mutual fund returns.
What if Neil pays off his home loan early and then invests in mutual funds?
Even if you add the Rs 70 lakh saved by paying off the loan early, starting an SIP would be beneficial than increasing the loan amount in the initial years.
That said, we are not saying that investing will always be beneficial. As we mentioned earlier, the result could have gone the other way as well.
For instance, if the loan is for comparatively shorter tenure, 15 years of less, increasing the loan amount could be beneficial.
So, use these calculations as a guide for your analysis. The answer could vary in different scenarios.
Hope it helps
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