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Should your home loan be repaid?


Should your home loan be repaid?

If you have been repaying your home loan and have recently got a surplus amount by way of a bonus through any old investment maturation or bonuses, will you be paying off the entire home loan? Most people, particularly those who are salaried home loan applicants, often consider paying off their home loans in order to lower their overall financial burdens. Instead of jumping to pay off the home loan, consider the pros and cons.

Here’s when you should not repay the entire home loan-

Home loans come with several tax benefits both in terms of the principal and interest that you repay annually. Interest benefits are given up to Rs. 2 lakh as per Section 24 and under Section 80C, benefits up to Rs. 1.5 lakh are offered on the principal amount. In case there is joint ownership with a co-applicant like your spouse, the limit is Rs. 2 lakh for every individual. You can actually save a whopping Rs. 1.08 lakh rupees by way of tax payments which works out to 30.9% on a total of Rs. 3.5 lakhs combined. In case this surplus amount cannot be deployed anywhere else by investing in any asset which gives more returns or any other purposes, then you can clear off the loan.

Once this loan is repaid in full, your surplus money may be exhausted and there may be a crunch linked to liquidity levels. You can invest a certain portion of the EMIs in SIPs or mutual funds which can earn more as compared to interest on home loans. You can build up a sizable corpus by investing the surplus amount in assets which give you better returns, particularly if you keep increasing your SIP amount periodically or annually.

You should consider whether repaying the entire debt will make you absolutely stress-free or completely relaxed. Will you be satisfied by earning healthy returns on your investments? Consider the financial phase that you are in and then take a decision. Work out your overall appetite for risk and whether you will be comfortable with investing in equity or mutual fund related investments which come with market related risks.

You should also consider whether you have adequate savings which can cover your home loan EMIs in case of a job loss or any such financial emergency. You should always have adequate backup available in order to meet any potential liquidity crunch. Do not be in a tearing hurry to repay your home loan even if it becomes a major burden on you. Always think that you are building an asset and if you had not applied for the home loan, then you would not have been able to create this asset. You should instead look to build wealth for repaying the loan but this should only be done with adequate financial planning.

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