Should You Prepay Your Mortgage Or Invest?

Home loan

The home loan not only offers tax benefits but also helps build an asset that has the potential to appreciate in value – property. The tax benefit is not only available for interest payments but also for principal repayments. Besides, if Rakesh is a first time home buyer, he gets an additional tax benefit of Rs 1 lakh on the interest paid on the home loan. In other words, the home loan should be left untouched. Rakesh should continue to pay the EMIs as and when they become due.
The tax benefit is not only available for interest payments, but also for principal repayments.

Car loan

Unlike a home loan, a car loan does not help build an asset that will appreciate in value. In fact, once the car is purchased and starts being used, it will only depreciate in value. Besides, car loans are expensive. Clearly, Rakesh should repay the entire car loan. If the bank levys a prepayment charge on Rakesh, he should negotiate this with the bank and either have it reduced or cancelled. In any case, even if there is a prepayment charge, he should pay this off and repay the entire loan.

Invest the balance

Now Rakesh will be left with Rs 11 lakh (Rs 15 lakh – Rs 4 lakh used to repay the car loan). He should invest this money. In fact, this money will provide Rakesh security that in case of any unfortunate circumstance due to which he is unable to repay the entire home loan, he can use these funds to do so. Rakesh should invest this money based on his risk-taking capacity and tolerance (either invest in gold, debt, equity, or partly in each of these options).
Endnote
Not all loans are bad. If a loan helps you build an appreciating asset and offers you tax breaks on capital repayments and interest payments, it’s worth holding on to it. However, repay loans that are pure expense loans with no tax breaks.