The current generation is more inclined towards acquiring a home early in their lives. Once you ensure that you can get a loan using any home loan eligibility calculator, you are just one step away from turning your dream of a new house into reality.
When you have a lump sum amount, you want to tweak your home loan. It leaves you contemplating whether to use it to reduce your existing burden or create additional income opportunities.
If we go by the book, it is always recommended to clear your debt first and then look for additional income. Is the choice that simple? Let us find out.
- Higher credit utilisation can impact your credit score
It is advisable to restrict your EMIs to a maximum of 40% of your in-hand salary in most cases. Most finance experts suggest a ceiling of 30%. It would help you achieve your other plans conveniently. Also, it would not affect your credit score, and ultimately your future borrowing ability.
If you are unsure, you can utilise a home loan EMI calculator to ascertain if you should invest or prepay in such a situation.
- There is tax saving involved
Any home loan above ₹ 40 lakh would mean you pay well over ₹ 2 lakh per annum as interest. You may ask why ₹ 2 lakh? As per taxation norms, the government allows a maximum deduction of ₹ 2 lakh per annum towards interest repayment. In such a case, you are better off paying a part of your home loan and bringing it down to ₹ 30 lakh or below.
- Investment yields higher returns
Home loans generally cost around 7-9 percent per annum. In the hindsight, an FD may pay the same return, but what you see is a nominal return. The real return is post-tax, i.e., around 5.4%. If you have investments that fetch a return of at least 8 percent post-tax, it may well be the more feasible option for you.
- Be prepared for emergencies
According to Pankaj Mathpal, the founder of Optima Money Managers, though no debt is a great situation to be in, one must have proper emergency fund and health insurance to take care of any emergencies.
Being able to achieve the right balance would suit you the best. With markets being highly volatile, any additional sum should first go into an emergency fund to take care of your family for the next six months or more. The amount that remains can be used to curtail your debt. Utilising an efficient home loan EMI calculator can clear most of the doubts you have around this topic.
- There is no right or wrong decision here
The decision of whether to invest or prepay would depend on a plethora of factors. So you must practice due diligence and take a call after weighing both options.
With some diligent paperwork a home loan can be availed easily, but you have to remember that it is a commitment of minimum twenty years or more. So weigh all the available loan options using a home loan calculator and make an informed decision. With the home loan EMI calculator of CRED you can find out what suits your pocket the best.