Save Rs 11.27 lakh on Rs 50 lakh home loan: How investment can be better choice than prepayment

Home Loan Prepayment or Investment: When we take a home loan for a long duration, we often pay more interest on it than the principal amount, resulting in a considerable repayment at the end of the loan. One of the most effective ways to cut down on repayment significantly is prepayment, where you not only repay a much smaller amount, but the loan duration is also notably slashed.

E.g., if you take a Rs 50 lakh home loan for 20 years at a 9 per cent interest rate, your equated monthly installment (EMI) will be Rs 44,986; you will pay 240 EMIs; and your overall repayment amount will be Rs 1.07 crore. 

But if you pay one extra EMI every year starting from the 13th month, then the 25th, 37th, and so on, you will repay the home loan in just 12 years.

In another scenario, if you pay a 5 per cent extra payment every year at a reducing rate, you will repay the loan in 12 years and will also save nearly Rs 28.19 lakh in overall repayment.

But what people don't realise is that instead of prepaying a home loan, if they invest that money in a scheme that gives them decent returns, they can end up saving more money than they would have in a home loan prepayment. 

What if you opt for investment instead of prepayment?

E.g., if you had taken a home loan of Rs 50 lakh and opted for a 5 per cent prepayment of your home loan on the 13th month of the loan, you would have paid Rs 2,45,318 in the first year.

The amount would have been reduced every year and in the last year of the loan, you would have paid Rs 24,442.

Home Loan Prepayment vs Investment Charts

For a Rs 50 lakh home loan

Chart courtesy: Bankbazaar.com 

Opportunity Cost of Pre-payment

Chart courtesy: Bankbazaar.com 

Now, since you are not prepaying and investing the same money with the first installment in the 13th month of the loan, your total investment in 12 years would have been Rs 1,554,139.

With that investment, at an average 12 per cent return on equities, you would have got Rs 3,935,828.

Had you invested the same amount in a debt mutual fund with an average return rate of 7 per cent, you would have been richer by Rs 2,648,823.

The same investment at a return rate of 6 per cent in gold would have fetched you Rs 24,05,020.

When you were opting for a 5 per cent prepayment every year for a home loan of Rs 50 lakh, you were saving Rs 28.18 lakh in repayment in 12 years.

While in an investment scheme, modest returns of 7 per cent in the same duration are helping you earn nearly Rs 26.49 lakh, while investment in equities would have helped you earn as much as Rs 39.36 lakh.

Hence, if you prefer investment to prepayment of your home loan, there are high chances that you will end up saving more money.

Though equity investments are market-linked and no one can assure you returns of 12 per cent, smart planning can always help you get good returns.