It is always great to receive a bonus at work. Now, when a home loan borrower receives this kind of bonus on some festival or their annual bonus, they have a decision to make; invest the additional funds or use them to prepay their home loan, if any. While both have their advantages, it is important to choose between the two, and this can get quite confusing.
In order to decide between the two, there are a few factors that the borrower needs to consider which will help in understanding which move would have the best possible outcome. So, assess the following factors to understand whether it would be beneficial to invest the surplus money or use it to prepay the home loan:
- Peace of mind
For most people, a housing loan is the biggest loan that they will ever take. In this case, it is normal to be worried about clearing the loan’s monthly instalments on time. If a borrower is worried about their home loan and is undergoing a lot of stress because of it, it is better for them to first focus on clearing off the loan as soon as they can. However, if they are confident of clearing the home loan’s monthly instalments without any financial difficulty, they can then think of investing their bonus.
- Returns from investment
Before deciding whether to prepay the loan or invest the bonus, make sure to check the returns from the investment. As a general rule, if the post-tax return that an individual gets from an investment is higher than the effective cost of their housing loan, it could make sense to invest rather than prepay their loan.
- Tax benefits
One of the most important factors to consider while deciding whether to invest a bonus or prepay a home loan with it is the home loan tax benefit. The principal amount and the interest component of the home loan EMIs can be claimed for tax deductions under Section 80C and Section 24 respectively. To keep enjoying these tax benefits on the home loan interest rate and principal amount, it is advisable to continue with the regular home loan EMI schedule. Instead, investing the surplus amount could be more beneficial in this case.
- Availability of emergency funds
It is essential for an individual to have an emergency fund to fall back on in times of financial difficulty. This fund should take precedence over prepaying a home loan. One can never know what life throws at them, and if for some unfortunate reason they are unable to earn an active income anymore, an emergency fund can provide the required finances.
- Retirement planning
If the individual is facing no complications with clearing the home loan EMIs with their regular schedule and looking to plan for their retirement, prepaying the loan might not be the best option. Instead, they can continue to repay the home loan’s monthly instalments comfortably and invest the surplus in a scheme that gives them good returns in the long run.
Finally, choosing between the two can differ based on each borrower’s financial standing and preference. Make sure to consider all these factors before deciding what’s best!