Should I repay my home loan or invest? Should I pay off my student loan or invest the money? Should I pay off debt or invest?
These are few of the common questions I have faced many times. What do you think the answer would be? There will be no straight forward answer to this question, rather based on scenario, the solution will be different. In this article we will discuss the topic “Prepay home loan or Invest“.
In case you have enough money then you can repay the home loan first or you can invest in another property as nothing will impact your current life style and financial planning. But in case you are from a middle class or upper middle class section, who got some money in hand by not able to decide whether to repay home loan or invest somewhere or go for another flat, then you have to ask yourself these 10 questions before coming to a solution.
Should I Repay My Home loan or Invest
Before proceeding further let’s check out the dilemma of Sharmaji related to this topic.
He has a home loan of 20,000,00 for 20 years and right now he is in his 2nd year only. Suddenly he received 20 lakh amount from his other sources. But at the same time Sharmaji want to buy a 3 BHK flat near to his office area. But he doesn’t know what he should do in this situation.
Solution can be provided in below cases:
Case1: Here Sharmaji might repay the home loan first and then he will be free from debt. Then he can plan for for his new dream home. But what if the new home requires a healthy down payment?
Case2: He may repay 10 lakh to home loan and then rest can put for new home down payment and then opt for the new home. If the new property is a under construction then this might be a problem in coming days as he has to bear both the loan after some time. And there might be no other income source for him.
Case3: If the property is a ready to move, then sharmaji can buy the new flat and move there and rent out the old one. But here in case new flat price is 20 lakh then sharmaji will be the most happiest person in the world. But in case the flat cost is 50 lakh then he has to go with case2 solution. But here he can earn some money by renting out the old flat as well.
Home Loan Repayment or Investment : 10 Questions to Ask
So this might be a straight forward solution or situation happened to Sharmaji. But he might have to think other situations as well before proceeding to any solid decision. Let’s ask few such question to Sharmaji so that he can think on that and then come to a good solution.
1. Do you consider the tenure of home loan remaining on your current outstanding Loan and the Interest rate. Is it high or low?
2. Do you need any other loan for other family or financial purpose (marriage, higher education etc)?
3. Do you have any medical surgery planned or any other treatment planned where you might need hard cash?
4. Are you falling into a higher income tax bracket? Then 1.5 lakh relaxation on your home loan interest payment may save your 45000/- yearly.
5. Is your future clear to you regarding investment return and risk point of view? Are you sure your family is well insured and you can leave enough money for their upbringing in case you die accidentally?
6. Is your current property in good condition? Is there any maintenance activity planned, E.g. Roof top maintenance, furniture upgrade etc.? Do you know how much cost that may involve? If you live in the US, you might contact a reputable local contractor like Style by Carden Roofing to find out how much money you need to put aside for that. In India I am not sure what are such alternatives.
7. In case you opt for a new property will you be able to handle 2 loans at the same time? Do you have a backup earning option or is your spouse also earning significantly so that you can go for applying for a home loan with spouse.
8. Are you sure your business or job will be able to secure your earning in the same pace and expectation for next 20 year or more?
9. Have you fulfilled your or your family’s other dreams, like a car, an overseas holiday trip, kids admission to the best school etc.?
10. Are you purchasing the 2nd property in the same city or different city? Will you be able to take the benefit of this investment considering your financial position, family position and need after 20-25 years?
So if you think you are also in the same boat of Sharmaji then try to list out the answers of these few questions. Then you will automatically find out the solution of your question “Should I repay my home loan or invest in new property”. Hope you will be able to take a careful move for your future.