If an individual is generating higher returns after-tax than the current interest rate on the home loan, then he should invest the surplus money.
The inequities returns can be muted and investors who started to invest in equities now should not expect much higher returns. Before repaying loans that help in building an asset in the long run, an individual must ensure adequate emergency funds to cover expenses of life and health insurance cover.
In an emergency, the person can take a personal loan, which has a higher rate of return than a home loan and in the case of a vehicle loan, it is wise to pay off with surplus cash.
Prepay home loan
As equity investments provide higher returns, one can book profits and prepay a part of the home loan. According to an expert, the ideal strategy in the bull market is to remain invested with occasional partial profit bookings while moving some profits to fixed income or to prepay loans that have higher interest rates, if individuals are not in a position to make a lump sum payment, then they can go for a systematic withdrawal plan from their mutual fund investments and use the monthly proceeds to step up the EMI.
For a salaried employee, EMI helps the borrower to progress in the career, have higher pays packages which will result in higher disposable income. Banks do not charge a penalty on the prepayment of floating loans. The Income Tax Act provides a tax deduction of interest on home loans in case of self-occupied up to Rs 2 lakh and up to Rs 1.5 lakh on the principal repayment U/S 80C.
Clear credit card dues
Any surplus money that may be used to pay off the credit card dues, paying off the monthly liabilities. Rolling credit is a lot more expensive than even a personal loan, which can be availed at 13-15% per annum. So, when the credit card bill with a higher interest rate is paid off from the surplus money, then an individual should switch to the card with the low balance pending.
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