Factors to be considered before taking decision with respect to repayment of home loan

Basically, whenever you are having surplus funds, you find yourself in a dilemma, whether you should repay loans or should go for investment of those funds. In this blog we will try to clear various concepts and misunderstandings associated with loans repayments and cash management. Hopefully after going through this blog you will be in a position take appropriate decision.

Lot of times it may happen that you are having surplus funds in your account (if you are salaried, you may have got arrears of increment or annual performance bonus or if you are a businessman, you may have got profit resulting in surplus funds, then the question will always toggle in your mind whether to repay loans or should you invest.

Following are some of the factors you should consider before taking the decision:

First repay loans with higher rate of Interest

If you have multiple loan and you have surplus funds then you should repay loans with higher interest first. For example, anyone having outstanding dues on credit card, personal loan and home loan then he / she should clear dues on credit card first (as ROI is 24 to 36%) then personal loan (10 to 12%) and lastly home loan (7.5 to 9%).

Emergency Fund

There may be emergency requirement of funds for various contingencies such as medical emergencies, unexpected issues etc. As per your assessment you should keep aside a certain portion of money. It should never happen that entire funds are allocated for the repayment of loans. Please keep in mind that once you prepay loans there no easy accessibility to the funds (barring few products) and you have to apply again for the fresh loans.


Now one can explore the option of investment of amount in various investments rather than prepayment of loans but the pertinent question is those investments will able to fetch higher returns post tax. Because investments in FDs, liquid funds (debt funds) will give you lower returns than the rate that you are paying on the home loan. Also the income from investment will subject to tax hence post tax returns will be lower than the mentioned rate. For example, FD rate of interest is 6% and if you are in 30% tax bracket then the effective post tax returns will be 4.2% (6% – 30% of 6%) and if you compare 4.2% vis a vis Home loan rate then it is much lower. Also, investments in equities via mutual funds or direct investment in stocks does not guarantee the yield and also there is risk of negative returns eroding your capital. In short if you are confident about yield then go for it or its better to pay off the loan.

Interest saving home loans

There are certain products available in the market where you can deposit the surplus funds in the separate bank account and you can operate that account as normal saving account i.e. you can deposit the funds when it is surplus and withdraw whenever required. The advantage of this is that you will be charged interest only on the outstanding amount after adjustment of the surplus money deposited in the account. The interest rate in slightly higher (+0.25%) and if you have considerable surplus money then the product is useful for you. Please refer to our calculator to decide whether you should opt for this product.

Taxation aspect

Lot of customers keeps the home loan going even if they are having surplus funds keeping the taxation aspect in mind. Let’s understand with an example how it affects your cashflow. Let’s assume you are paying Rs.1 lakh as interest on home loan and currently you are in 30% tax bracket then effectively Rs.70000/- will go out of your pocket (-Rs.100000/- as interest + Rs.30000/- tax saving) If you have surplus funds and you decide to prepay this loan then you will be benefitted to the tune of Rs.70000/- even after paying taxes of Rs.30000/-. Even if risk free returns on the funds used for foreclosure of loan is considered still paying of loan will be better option since you have to pay tax at 30% on the returns on the funds. The whole calculation will be more favourable if you are in lower tax bracket.

If you are paying higher interest then its worth while to payoff the loans as the deduction for interest payment is capped at 2 lakhs only.

To conclude if you have funds and if you are keeping home loan only for the taxation purpose then its better to pay off the loan as the overall calculation will be in your favour.

Top up loans

If you have done the partial prepayment of home loan and if you need funds for personal requirement then you can avail top up loan. However, keep in mind that you have to go through the whole process again and taxation benefit will not be available for interest paid on top up loans.


The decision rests on the what is alternate use and yield on the funds (post tax) and certainty with which you will get the yield. If you are going to keep it in FD then its better to pay it off keeping certain portion aside for emergency.