Purchasing a home is a significant milestone for many individuals in India, often financed through home loans. While home loans provide a convenient way to fulfill the dream of owning a house, the long tenure and interest payments can be burdensome. However, with a well-planned investment strategy, it is possible to accelerate the repayment of your home loan and become debt-free sooner.
To achieve this, it’s crucial to implement effective investment strategies that align with your financial goals and risk tolerance.
Increasing EMI
One of the simplest and most effective strategies to expedite the repayment of your home loan is to increase your Equated Monthly Installment (EMI) payments. By paying more than the minimum required EMI each month, you can reduce the principal amount and, consequently, the interest paid over the loan tenure.
Increasing your EMI payments requires careful evaluation of your financial capabilities. Assess your budget and determine if you can allocate additional funds towards your EMI. Even a small increase of a few thousand rupees can make a significant difference over time. This approach is sometimes referred to as a “micro pre-payment” strategy.
By increasing your EMI, you not only reduce the outstanding principal but also save on interest payments. This allows you to pay off your home loan faster and save money in the long run. It’s important to strike a balance between increasing your EMI and ensuring you have enough liquidity for other financial obligations.
Adhil Shetty, CEO of Bankbazaar, suggests that if you have limited liquidity but still want to pre-pay, increasing your EMI by a small margin can be a viable option. This way, you can continue investing and strengthening your finances while accelerating your debt payment. This approach allows you to focus on both investing and pre-paying, rather than choosing one over the other.
Remember to consult with your financial advisor or lender to understand the impact of increasing your EMI and to ensure it aligns with your financial goals.
Invest in fixed deposits
Investing in fixed deposits (FDs) can be a beneficial strategy to accumulate funds for making lump sum prepayments towards your home loan. FDs provide a safe and predictable return on investment, making them an attractive option for individuals looking for stability.
When investing in FDs to expedite your home loan repayment, it is advisable to choose FDs with shorter tenures. This ensures that the funds mature around the time you plan to make prepayments. By aligning the maturity of your FDs with your prepayment goals, you can utilize the interest earned on these deposits to reduce the outstanding loan amount.
FDs offer a fixed rate of interest over a specific tenure, allowing you to calculate the interest earnings with certainty. These interest earnings can be used as a lump sum towards your home loan prepayments. By effectively utilizing the interest earned from your FDs, you can reduce the principal loan amount and potentially shorten the loan tenure.
Systematic investment plans for mutual funds
Systematic Investment Plans (SIPs) for mutual funds can be an effective strategy for accelerating the repayment of your home loan. SIPs allow you to invest a fixed amount at regular intervals, typically monthly, in mutual funds.
When utilizing SIPs for the purpose of paying off your home loan, it is recommended to invest in equity-oriented mutual funds. These funds have historically provided higher returns over the long term compared to other investment options. Equity-oriented mutual funds have the potential to generate substantial growth, which can contribute to building a corpus that can be used towards prepayments on your home loan.
By investing regularly through SIPs, you benefit from the concept of rupee cost averaging. When the market is low, your fixed investment amount buys more units, and when the market is high, it buys fewer units. Over time, this averaging effect helps mitigate the impact of market volatility and potentially provides higher overall returns.
Public Provident Fund
PPF is a government-backed long-term investment scheme that offers attractive interest rates and tax benefits. Consider opening a PPF account and contribute the maximum allowable amount each year. The maturity amount can be utilised to make substantial prepayments towards your home loan, significantly reducing the interest burden.
Direct stock investments
Investing in stocks requires thorough research and market knowledge, but it can yield substantial returns. Identify fundamentally strong companies and invest in their shares with a long-term perspective. If you achieve significant gains, consider using a portion of the profits to make prepayments towards your home loan. However, exercise caution as stock market investments carry inherent risks.
