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For most people in India, buying a home is one of the biggest financial steps they will ever take. A home loan makes this dream possible, but it also ties you into years of monthly EMIs. Paying these instalments for 20 or 25 years can feel like a never-ending commitment. Borrowers can use a home loan calculator with prepayment to see if clearing the loan is possible. That said, while many borrowers hope to close their loans ahead of schedule, not everyone has the funds to make large prepayments.
If you are wondering whether there is a way to reduce your loan tenure without putting additional strain on your finances, there is a strategy you can consider. Instead of making hefty one-time payments, you can combine disciplined investing with your regular EMIs and gradually work your way towards an earlier loan closure.
How this approach works
Let us break this down using a simple example. Suppose you have taken a home loan of Rs. 80 lakhs at an interest rate of 7.5% for a period of 20 years. This works out to an EMI of around Rs. 64,500 every month. Sticking to this payment schedule, you will repay the full amount in 20 years while paying a significant sum in interest along the way.
Now, rather than attempting to do huge prepayments every two to three years, you can create a parallel investment. For instance, you can keep aside approximately 10% of your EMI amount, that is, about Rs. 6,400 per month, and invest this amount periodically in equity mutual funds.
While your EMI goes on as per normal, this extra investment increases on the side. In the years to come, if the equity funds give an average return of 12% every year (a fair long-term expectation of equity markets), the money you invest each month will accumulate into a large corpus.
What could happen over time?
Home loan calculator with prepayment is considered central to planning prepayments. But according to wealth advisors, this new approach can work well. Assuming you maintain this plan and remain invested for the entire duration, by the 13th year, your total investment may be substantial enough to completely pay off the remaining portion of your home loan. This would imply you can settle your loan nearly 7 years ahead of schedule without ever having to make any significant lump-sum prepayments in the initial stages.
In short, instead of finding ways to raise large sums for prepayment, you build a separate fund alongside your EMIs, and that fund eventually helps you close your loan ahead of time.
Why this strategy may work
There are a few simple reasons why this approach can be effective for many borrowers:
Equity markets usually offer higher long-term returns: Home loan interest rates in India generally range between 7% and 9% today. Over long periods, equity mutual funds have historically delivered annualised returns between 10% and 14%. This difference allows your parallel investment to grow faster than your loan outstanding reduces.
You avoid liquidity stress: Since you are not making large, one-time payments, you do not risk emptying your savings or emergency fund. The periodic, smaller investments are easier to fit into your regular budget.
You continue to have financial flexibility: At the time of any financial need, your invested corpus can still be withdrawn. You have the option to redeem it partially if needed at all times.
No stress for continuous prepayment: Rather than stressing about prepaying the amount and when, you just maintain a regular investment schedule and allow compounding to do its magic.
A few conditions you must keep in mind
Although this strategy sounds straightforward, it only works if you stay disciplined and follow some basic principles:
Be prepared for a long-term commitment: Equity markets can be volatile in the short run. This strategy is only effective if you remain invested for 10 years or more. If you panic and withdraw early, you forgo the benefit of compounding.
Returns have to be above loan interest rate: For this strategy to be most effective, your average return on your equity investments must ideally remain above your home loan interest rate in the long run.
Stay invested despite market fluctuations: Avoid responding to short-term market fluctuations. Stay invested during good and bad years, and check your portfolio once annually, not monthly.
Don’t forget to use a home loan calculator with prepayment feature to see how your debt burden reduces when you prepay using this strategy. We explore all about the home loan calculator with prepayment below.
Use the right tools to plan smartly
Prior to beginning this plan, it is useful to compute your loan figures accurately. Use a home loan calculator with prepayment to see how much you still owe, how prepayments can affect your EMI and tenure, and whether small extra payments make sense alongside your investments.
At the same time, do not forget the one-time expenses that accompany your home purchase. Use a stamp duty calculator to account for government charges and registration fees when estimating your total cost of buying the property. Factoring in these costs upfront helps you plan your budget more accurately.
Why not simply prepay instead?
For some borrowers, using a home loan calculator with prepayment feature to make periodic prepayments is still a valid option. But prepayments require spare funds, which you may not always have. More importantly, prepaying heavily may leave you with little or no liquidity for other goals such as retirement, your child’s education, or emergencies.
The parallel investing approach allows you to keep your money working for you while reducing the risk of being cash-strapped later. Once your investment corpus grows large enough, you always have the option to redeem it and pay off your home loan early.
Final thoughts
Paying off your home loan faster doesn’t always mean you must make huge sacrifices or arrange for lump-sum payments. With steady investing and proper planning, you can gradually work towards early loan closure while still keeping your finances stable.
By using simple tools like a home loan calculator with prepayment and a stamp duty calculator, you can map out your repayment journey and track your progress. Over time, disciplined investing can help you achieve debt freedom sooner than expected, without the financial strain of aggressive prepayments.
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