For most of us with outstanding home loans it is an ever present dilemma as to whether to use surplus cash available to prepay the loan or invest the cash elsewhere. We at Prudent Finvest feel that it makes more sense to invest your surplus cash than to prepay your loan. We offer following points to consider before taking the decision.
Please note the discussion here is solely about housing loans. Other high cost loans such as personal loans and credit card loans should be repaid as soon as possible since these have astronomical interest rates.
- Use yield on surplus cash to service the loan: If you invest your cash in yield generating assets, you can use the yield to keep paying the EMIs on your home loan. This way you retain the surplus cash with you and also keep earning perpetual income even after repaying the loan completely. There are several alternative avenues to invest in for yield. Please check out our yield generating strategies to effectively utilize your surplus cash in a way to generate perpetual inflation proof income. As an example, if the rate of interest on your home loan is 8% annually and using our yield generating strategy, you earn 10% annually on your surplus cash, then it makes sense to invest that cash instead of repaying the loan.
- Cash on hand is flexibility:Always remember the cardinal rule of investing: Cash is king. When you prepay your loan, you are effectively investing in an illiquid asset, i.e. your home. Your home is not going to generate any income for you in the future unless you sell it. On the other hand, by investing surplus cash in income yielding investments, you are getting flexibility to deploy that cash smartly in a way to generate a superior return.
- Real value of loan diminishes with inflation: This is a very important concept in investing and not very well understood. Since the amount of loan you owe to the bank is fixed, in an inflationary economy such as ours, the value of that loan reduces over time. Let us assume your loan amount is Rs 25 lakhs and the rate of inflation is 7%. The real value of this loan next year will reduce to Rs 23.36 lakhs and so on as years go by. On the other hand value of financial assets such as equity only go up with inflation as equities are the only asset class to generate inflation proof returns. So it makes total sense to invest any surplus cash in a portfolio of growth and income generating equity funds and strategies instead of repaying loans.
If you are looking to improve the yield on your fixed income capital or are trying to earn extra income out of your accumulated investments, please get in touch with us. We offer a Virtual HelpDesk for our clients, where you can request a free video consultation with us to answer your financial and investing queries.