As the rate of inflation in the US is not coming down, the Federal Reserve is giving a 'pay date' for interest rate cuts. A few days ago, one of the members of the Fed created a sensation by making such a statement that the interest rates may rise. As a result, here we also see RBI postponing the decision on repo rate cut. This means that the loan installment will not be reduced for another two-three months. At such a time, some churches are thinking of reducing their investment and reducing their burden by paying that money in home loans.
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Interest rates on home loans are likely to remain high. The reason for this is that the interest rate cut by the RBI is unlikely at the moment, so the loan installments of home loan holders may remain higher for some time. Nowadays, many people pay mutual fund SIPs along with home loan installments. Currently, the stock market is at a high level. At such a time, many people are thinking of reducing the investment amount and increasing the home loan installment. Whether it is right or wrong may depend on the situation. Of course, it is possible to save a lot of money if the home loan is paid off on time. However, there is no need to emphasize the issue of early repayment.
It is not advisable to pre-pay in haste
There may be different views on pre-payment. It is important to balance home loan early with other financial needs in your life. So what should we do? E.g. If the interest rate on your home loan is 8.75 percent, the effective interest on the home loan comes down to 8 percent after the size of the home loan and tax deductions under Section 24B.
Pre-payment reduces debt burden
If you pay off your home loan early, you won't need to pay 8.75 percent interest on the outstanding amount. Now let's compare it with investment. Investing in shares has been good in the last two years. The 'XIRR' of your equity portfolio will be higher than the interest rate of your home loan.
Decline in stock market reduces returns
If we think a little differently, the market may be sluggish for some time. At such a time, the returns on the stock market may decrease, so you can reduce the investment amount and prepare to pay it in home loan. One has to understand the difference between the savings generated by this strategy and the return on investment in the stock market.
Better return on equity over long term
In the long run equity market can earn an average return of ten to twelve percent. Of course, this has always been more than the home loan interest rate. A return on investment is likely; But there is no guarantee. In the stock market we can get ten to twelve percent returns in the long run; But it cannot be guaranteed.
Decision to stop investment
If you don't pre-pay and continue to invest, it may still be a good decision; But if the market is collapsing and you are not pre-paying, the decision will not be right. Returns on mutual funds are not guaranteed. However, historically, the returns on mutual funds have been higher than the interest rates on home loans in the long run. So instead of aggressively paying into debt, it would be a good decision to continue investing.
Pre-payment is advisable if older
Home loan should be looked at according to your age. If you are young, you have a lot of time. In such a situation, the debt repayment option is not given much importance as compared to investment. However, if you are nearing retirement and have a lot of debt, paying off your debt early can be a good decision.
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