There are tax benefits on the interest paid on the home loan and the principal amount
There are some advantages of buying a home by taking a home loan. Home loans are generally cheaper compared to other personal loans and repayment of installments periods depends from year to year i.e. 15 to 20 years. Some financial institutions are even offering home loans for a period of 30 years.
When the rates of interest on home loans are lower, the repayment period is longer, the total interest payment is higher, as the amount of monthly installment (EMI) will be lower.
For banks and financial institutions, they have long-term income for 15 to 30 years on home loans.
If a borrower gets some lump sum money or his/her regular income rises substantially, then should the extra money be used to repay the home loan or he should invest somewhere to generate wealth?
Repayment Decision depends on a case-case basis.
Unstable Career
If there is uncertainty in future earnings, it’s better to reduce future liabilities by repaying home loans as early as possible.
High EMI amount
If the amount of EMI is very high compared to monthly income then it’s better to repay a part of lump-sum money to reduce the EMI amount.
Investment decision depends on the following factors
Low-interest rate
As interest rates on home loans are generally lower than other loans, there is an opportunity to generate higher returns through investment.
Long tenure
If the home loan tenure is over 15 years, a person gets a chance to invest in long-term instruments like equity, debentures, bonds, etc, and generate a higher rate of return compared to the ROI on a home loan.
Tax benefits
There are tax benefits up to a certain limit on home loan interest and principal amount, it’s better to repay installments/EMIs to enjoy the tax benefit instead of paying a lump sum amount. Also repaying in a lump sum would exceed the limit of tax benefit in the year of excess repayment installments and it will curtail the scope of future tax benefits.
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