Investment Calls: Should You Pay Off Your House or Invest in Mutual Funds?

Home Loan vs Mutual Fund Investment: When buying a house with a home loan, it is important to assess our current financial situation to determine the affordable Equated Monthly Installment (EMI). As our income grows, we may be faced with the dilemma of whether to make prepayments on our home loan or invest in a mutual fund. With loan rates exceeding 9% for many individuals, borrowers may be feeling the impact of higher interest costs. In light of the fact that rates are now exceeding the yields on many safe debt instruments, it may be advisable to consider making early payments if it is financially viable.

Sometimes, when we receive a fixed amount of money, we consider whether investing in mutual funds would yield better returns than paying off our home loan early. So how do you decide what’s right?

Factors that should be considered when making this decision include financial objectives, risk tolerance, expected rate of return and prevailing interest rates. Ultimately, the decision to invest in mutual funds or prepay a home loan depends on individual circumstances.

“When contemplating prepayment of a home loan, it is important to consider the opportunity cost of capital that can offer higher long-term returns and capital appreciation and also your cash flow position, i.e. if you You can continue to repay the EMIs easily during the loan tenure. You should also consider possible changes in interest rates. If interest rates are expected to decrease, it is not advisable to pay early, taking advantage of the low loan costs. It might be a good time to at least partially consider repaying the loan,” said Priyank Shah, co-founder and CEO of The Financialist, a startup.

Although the tax benefits associated with home loans can reduce after-tax rates, for many individuals, it is still preferable to pay off their loans as quickly as possible.

“Tax implications play a crucial role in investment decisions, especially in relation to home loans. Under Section 80C, principal repayments are eligible for a deduction of up to ₹ 1.50 lakhs. Interest payments can be deducted under Section 24(b), with varying rules for self-occupied versus rented properties However, in the new tax regime, these deductions are not available for self-occupied properties, and for rented properties, the deductions are not available. Deductions are limited to taxable income, with no option to report losses. “Income from home ownership,” Shah said.

Before making the decision to repay your home loan, it is essential to consider your future financial needs. Home loans typically offer lower interest rates compared to other loan options such as personal loans. If you pay off your home loan and need additional funds in the future, you may end up borrowing at a higher interest rate. Therefore, carefully evaluate your future fund needs, including known expenses and possible emergencies, before deciding to pay off your home loan.

“When we prepay a home loan, we not only lose the opportunity cost of capital, but also the tax benefits that come with a home loan. When we buy a house on loan and invest the corpus in the equity markets for a period equivalent to the tenure of the home loan, we not only create a tangible asset in the form of a house but also enable the compounding of our equity portfolio,” added Shah .