Home Loan Vs SIP
Home Loan Pre-payment means early loan repayment in case of surplus cash lying idle with you. Prepayment basically means paying your loan's EMI installment before its due date. A home loan prepayment is calculated making use of prepayment calculator which helps you to gauge the impact of a partial payment of your home loan.
A partial prepayment lets you reduce the tenure of your existing home loan, EMI or both as per your financial requirements. It will also provide you with an amortization table to have a clear and better understanding of the savings you will have.
Why Prepayment of Home Loan is Good?
Home Loan Prepayment is financially beneficial for home loan borrowers. The main benefit of prepayment is the reduction in interest outflow. The interest component in the EMI is highest during the initial stage of the home loan. Therefore, prepayment of loans can be quite helpful.
What is SIP?
A Systematic Investment Plan (SIP) more popularly known as SIP is a facility offered by mutual funds to the investors to invest in a disciplined manner. SIP facility allows an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme. By taking the SIP route to investments, you can invest in a time-bound manner without worrying about the market dynamics and stands to benefit in the long-term due to average costing and power of compounding.
Why SIP is Better than Home Loan Prepayment?
Investing in SIP is the best option as prepaying home loans has more cons than pros, you might have to spend more money in case of prepayment and won't be able to claim tax deductions. Therefore, choosing SIP over prepaying home loan seems like the best option.
Home Loan prepayment Vs SIP - Which is Best?
The decision shouldn't solely depend on numbers. There are various other factors that affect this decision. Let's take a look at them.
- Liquidity: If you want to improve your liquidity then it's better to invest in debt mutual funds than prepaying a loan. In case you are looking for short-term liquidity then equity funds might not be an option for you. You might also look at moving your home loan into a super-saver or smart home loan kind of structure where the spare funds can be held in the home loan account.
- Risk capacity: Equity markets are volatile and the returns from them fluctuate highly and there will be a period of negative returns. Given this fact, one should be patient enough with them.
- Emotional State: If the fact that being in debt is bothering you and you want to debt free as soon as possible. Then paying off the home loan is a better choice.
- Other financial goals: In case you have other financial goals with tenures being close by, it is better to invest than prepaying a loan.
Choosing to prepay the home loan over investment in mutual funds or vice versa cannot be an ideal decision for everyone. It depends on individual circumstances and should be dealt differently. Hence, you should make an informed decision after considering the above factors.
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