For many people, the dilemma arises whether to invest their surplus funds in a fixed deposit (FD) or use that money to prepay a portion of their outstanding home loan. Both options have their advantages, and the decision ultimately depends on your financial goals and circumstances. In this article, we’ll explore the benefits of each option and provide insights to help you make an informed decision.
Benefits of Fixed Deposits
- Steady Returns: FDs offer a fixed interest rate, typically ranging from 6.5% to 8.5% per annum, depending on the tenure and the bank. Some banks even offer higher rates of around 9% for senior citizens.
- Low Risk: Fixed deposits are considered low-risk investments as they are backed by the bank’s guarantee, making them a safe option for risk-averse individuals.
- Liquidity: While FDs have a lock-in period, premature withdrawals are generally allowed, albeit with a penalty charge.
- Tax Benefits: Interest earned on FDs is taxable, but certain tax deductions can be claimed under specific sections of the Income Tax Act.
Benefits of Prepaying Home Loan
- Interest Savings: By prepaying a portion of your home loan, you reduce the outstanding principal amount, leading to significant interest savings over the remaining loan tenure.
- Reduced Debt Burden: Prepaying your home loan helps you become debt-free faster, providing financial freedom and peace of mind.
- Lower EMIs: If you opt for the reduced tenure option after prepayment, your equated monthly installments (EMIs) will decrease, freeing up more disposable income.
- Asset Ownership: Prepaying your home loan accelerates the process of owning your property outright, which can be a valuable asset in the long run.
Which Option is Better?
The decision between investing in an FD or prepaying your home loan largely depends on your financial priorities and the interest rates involved.
Consider this example: Suppose FD interest rate is 9%, and the home loan interest rate is around 8%. In this case, it may be more beneficial to invest in an FD, as the returns would be higher than the interest savings from prepaying the loan. However, this approach is only viable when you have a good monthly surplus.
The Practical Approach
Practically, it would make more financial sense to channel your surplus funds towards prepaying the home loan. This approach allows you to reduce your overall debt burden, freeing up a higher monthly surplus that can be invested in a disciplined manner in the future. Additionally, being debt-free provides a sense of financial security and peace of mind, as you no longer have a significant debt servicing liability in your life.
Disclaimer: (This information is provided solely for informational purposes. It is important to note that investing in the market or a business idea involves market risks. Before investing money as an investor/ owner/ partner, always consult an expert. DNP News Network Private Limited never advises to invest money on stocks or any specific business idea. We will not be liable for any financial losses.)