As a salaried individual, I have acquired a Rs 40 lakh loan for purchasing a house in Delhi NCR. The ongoing responsibility of paying monthly home loan EMIs has become burdensome. Currently, my outstanding loan amount stands at approximately Rs 23 lakh. I am contemplating whether it would be beneficial to make a partial repayment of my loan.
Reply by Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance:
Many home loan borrowers face the dilemma of whether to prepay their loans early or invest their surplus funds elsewhere. While early loan repayment might seem intuitive, it's important to understand its implications.
Aggressive loan repayment essentially concentrates your wealth into a single physical asset - your home. Instead, building a parallel corpus of financial assets helps create a diversified investment portfolio that can optimise returns while managing risks.
A diversified portfolio not only reduces the overall volatility of your net worth but also provides essential liquidity for unexpected emergencies or upcoming financial goals. This flexibility is something a fully paid-off home cannot offer.
From a purely mathematical perspective, the numbers tell an interesting story. Continuing your home loan (at 8-9% interest) while investing surplus funds in long-term assets like stocks or equity mutual funds (expecting 10-12% returns) appears financially advantageous. However, real-life considerations often paint a different picture.
Factors like job security, business stability, and personal comfort with debt can create anxiety about maintaining long-term loan obligations. In such cases, many people find greater peace of mind in accelerating their loan repayment.
When opting for a home loan with a floating interest rate, making partial prepayments does not incur any penalties. These prepayments immediately reduce the outstanding loan amount, resulting in a decrease in interest payments as well.
The choice between loan repayment and investment is deeply personal, influenced by both financial and emotional factors. Given these complexities, consulting a qualified financial advisor can provide a valuable and unbiased perspective - helping you evaluate your specific situation, understand your priorities, and develop a balanced strategy that corresponds with your objectives and comfort level.
(The views and investment tips by investment experts are their own and not that of Business Today. Readers are encouraged to consult a qualified financial advisor or a SEBI-registered investment advisor before making any investment decision)