Should You Prepay Your Home Loan?
Mutual Fund Insight|April 2023
Sunaina wants to know if she should use her annual bonus to prepay her home loan or invest in equities
Should You Prepay Your Home Loan?

The end of the financial year is just around the corner, that time when we are waiting for a work performance incentive. But have we decided on how to use this surplus money effectively? Facing the same dilemma is Sunaina, a 36-year-old IT professional earning a monthly salary of ₹1 lakh. Expecting a bonus of ₹2 lakh, she needs clarification on whether to repay a part of the home loan or invest in equities.

Sunaina took the home loan about three years back for ₹30 lakh at 7 per cent interest and a tenure of 15 years. She currently pays an EMI (equated monthly instalment) of ₹27,000. In addition, she is divided on which tax regime – the new or the old – suits her best. But let’s tackle the home loan-versus-equity question first.

Impact of home loan interest rate hike
Currently, Sunaina’s loan interest rate has jumped to 9 per cent. The rising interest issue might have also affected you in the last couple of years. Let’s understand why: these days, banks give home loans linked to the repo rate. (Repo rate is the interest rate at which the RBI lends money to commercial banks). It means when repo rates increase (which has been happening since last May), so do our home loan interest rates.

When home loan rates increase, banks stretch the tenure period, not the EMI amount. Therefore, in Sunaina’s case, her EMI amount will remain the same (roughly ₹27,000), but the loan duration will extend from 15 to 18 years. However, please note that the loan duration may extend greatly if you are:
a) in the initial stages of a home loan, and
b) if the loan interest rate has increased considerably.

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