When you have some extra funds with you, you start wondering whether it is a good idea to invest it or prepay your home loan. This post aims to provide you with all the information that you need to know about prepaying your home loan so that you can make an informed decision.
A Typical Scenario
The concept is best explained through an example. Imagine that you are a resident of Kochi, you are 32 years old, and you have purchased a flat in one of the lakeview apartments in Maradu. Also, suppose that you have a take-home salary of Rs. 100,000 per month, the outstanding balance against your home loan is Rs. 5,000,000, and the remaining tenure is more than 20 years. The home carries a floating interest rate of 10 percent and your monthly EMI payment is more than Rs 48,000. Now, recently you received a bonus of Rs. 500,000 and you started wondering whether you should prepay your home loan or save for your retirement.
Prepayment vs. Investment
If you are like most other people, you would find it emotionally fulfilling to make one of the lakeview flats in Kundannoor that you have purchased your own by paying off debt at the earliest, especially if you live there. Now, the question under consideration is whether you should use the bonus to prepay your home loan or park the money in financial products that offer good returns. One option available to you is to divide the funds equally among the two needs, prepayment and investment. However, a better option is to allocate the funds in a better manner by taking the ground realities and your personal needs into consideration.
Tax Benefits offered by Home Loans
If you are living in the apartment that you have bought in one of the luxury flats in Cochin, you can claim deduction up to Rs. 200,000 on the interest portion of your EMI paid for the financial year under Section 24. If you fall under the top tax bracket, it enables you to cut taxes by approximately Rs. 60,000 per year. If you are a first-time home buyer, you can claim an additional deduction to the tune of Rs. 50,000 on the interest component under Section 80EE. A benefit of Rs. 150,00O can also be claimed under Section 80 C on the principal portion of your EMI.
In order to decide whether you should prepay your home loan, the first and foremost thing you have to consider is whether the interest charged is too high. You can also take into consideration the interest rate after deducting the savings in tax and then compare the same with the returns you can earn if you park the funds in fixed deposits or equities. Interest rates of fixed deposits will always be lower than the home loan interest. However, equities can deliver higher returns in the longer term. Equities carry a lot of uncertainty in the shorter term.
Hebron Silver Shores (HSS) is a luxury apartment complex promoted by the trusted builder Hebron Properties in Maradu, Cochin. HSS is located in one of the fast developing neighborhoods in Kochi and it offers both 2BHK and 3BHK lake view apartments. For more information, please visit https://www.hebronsilvershores.com.