Should you repay your home loans now or go for investments?

Our parents would have saved for years to buy a home; current generations prefer possession of house at early stage of their life. As the income grows, they have a question either to make partial payment of loan or to invest surplus amount. Getting rid of any debt will save on interest.

Points to consider before making a decision

You want to live debt free

If may want to live debt free and want to get rid of home loan at the earliest, pay home loan at the earliest. Use your bonus/ return on investments to pay the home loan. Calculation for benefit of partial payment every year is given below.

Tax Benefit

There are tax benefit on principal and Interest paid. The principal component of EMI is considered as investment under section 80 C. The interest component is deducted from your taxable income under Section 24. Tax-deductible interest of 200000 will save 60000 maximum, it will also bring down effective interest rate. Details calculation of tax deductible interest, effective interest rate is given below.

Tax Benefit
Principal (Considered as Investment)	150000
Interest	200000

Return on Investment

In case, you invest in mutual funds yielding higher interest than cost of your home loan. Invest of 10000 per month in SIP will yield more than the interest paid for home loan. When the returns are more than 12% the return beat the home loan interest by big margin. Detail calculations are given below for different return rates.

Home loan interest/ Return on investment calculation

Home loan interest/ Return on investment calculation
Home Loan	300000	400000	500000
Tenure	25	25	25
Interest Rate	9	9	9
EMI	25176	33,568	41,960
Total Interest	45,52,766	60,70,356	75,87,946
Total Amount Payable	75,52,766	1,00,70,356	1,25,87,946
Interest @9 %	2,68,000	358000	448000
Tax deductable Interest	2 Lakh	2 Lakh	2 Lakh
Tax Benefit on Interest paid
Tax benefit (10% tax bracket)	20000	20000	20000
Tax benefit (20% tax bracket)	40000	40000	40000
Tax benefit (30% tax bracket)	60000	60000	60000
Net Interest Cost
at 10 %	248000	338000	428000
at 20 %	228000	318000	408000
at 30%	208000	298000	388000
Effective interest rate
at 10 %	8.33	8.50	8.60
at 20 %	7.66	7.99	8.20
at 30%	6.99	7.49	7.79
On pre-payment of 120000 every year will save interest and reduce tenure
Interest Saved	2649451	31,46,318	35,50,558
Tenure Reduced By	157 Months	140 Months	124 Months
SIP of 10000 (annual/Total)	120000/3000000	120000/3000000	120000/3000000
9 % return	11295303	11295303	11295303
12 % return	18976350	18976350	18976350
15% return	32840737	32840737	32840737
18 % return	58233121	58233121	58233121