Is Paying Off Your Home Loan Quickly Profitable or a Loss?

Most of us have bought our homes through a home loan. We often aim to repay the loan as quickly as possible. Generally, we consider debt a burden, and large home loans are seen as particularly heavy burdens. Therefore, people tend to make additional EMI payments or use any significant amount of money they receive to make part payments on their home loans.

One such example is Suresh, who used a substantial amount of money he received in 2020, just before the COVID-19 pandemic, to make a part payment on his home loan. Now, he regrets that decision. During the pandemic lockdown and subsequent economic slowdown, his company shut down for six months, and his salary was cut by 50%. He could not manage his home loan EMIs, and his loan became a non-performing asset. Recently, he received a notice from the bank demanding an immediate payment of ₹5 lakhs to avoid foreclosure.

Benefits and Risks of Quick Repayment

Suresh's situation would have been different if he had invested that money instead of making a part payment. He could have used the returns to pay his EMIs during the difficult period. Even a low-risk hybrid fund could have yielded 10-12% annually, providing him with enough to cover his EMI payments. Instead, his credit score dropped, making it difficult to obtain additional loans.

Long-term Strategy

For anyone considering making a part payment on their home loan, it's essential to think it through multiple times. Job stability and income continuity cannot be guaranteed, as shown by the COVID-19 pandemic. Always maintain an emergency fund of 3 to 6 months, or even up to 12 months of expenses.

Low Interest Rates

With banks and housing finance companies offering home loan interest rates as low as 6.68% due to high liquidity, it is beneficial to stick to the original loan tenure. The interest rate is almost equivalent to the inflation rate. Hence, there is no rush to prepay the loan. Instead, invest any surplus funds to potentially earn 10-12% returns, which is higher than the home loan interest rate.

Smart Investment vs. Loan Prepayment

Keeping excess money for emergencies or investing it wisely is the smart choice. The current home loan interest rate is nearly equivalent to the inflation rate. Thus, using surplus funds to invest, rather than to make additional payments on the home loan, is more profitable. By investing, you can earn higher returns, providing financial security and the flexibility to handle unexpected expenses.

Conclusion

Overall, holding onto a lump sum or surplus money for emergencies or investments is prudent. Given the low home loan interest rates today, investing surplus funds to earn 10-12% returns is more beneficial than prepaying the loan. This strategy ensures you have a financial cushion and can manage loan repayments effectively, leading to long-term financial stability.