Rethinking Home Loan Prepayment

Is paying off your home loan early always the smartest move? Not necessarily — and here’s why a thoughtful approach may serve you better.

🧾 The Scenario

Avantika (name changed), a team lead in a dual-income household, earns a CTC of over ₹25 lakhs. Five years ago, she and her spouse took a ₹60 lakh home loan with a 15-year tenure when they purchased their home.

During a recent financial planning session, Avantika expressed a strong desire to become loan-free as early as possible. She cited the emotional stress of carrying debt and the appeal of saving on interest payments.

Her instinct? Use surplus income to aggressively prepay the loan.

💭 The Assumption

Like many homeowners, Avantika believed that prepaying the loan would:

• Eliminate financial liabilities

• Save significant interest over the long term

• Free up more money for future goals

But is that always the best financial decision?

🔍 What the Numbers Revealed

When we reviewed Avantika’s loan amortization schedule, we discovered some key insights:

• Most of the interest had already been paid in the first five years — a common feature of amortized loans

• The interest component was now declining, while principal repayment was accelerating

• The interest rate was relatively low, and Avantika was availing of tax benefits under Section 24

🚩 The Key Insight

Prepaying the home loan at this stage would not lead to significant savings. With the high-interest portion already paid off, the benefits of prepayment had diminished.

Instead, there was a more effective strategy available.

✅ The TrueX Approach

We recommended that Avantika:

1. Continue with the current loan:Take advantage of the low cost of capital and the ongoing tax deductions.

2. Invest the surplus:Redirect surplus income into goal-based investments such as mutual funds, equity, or PPF. These avenues offered the potential for higher long-term returns compared to the interest saved by prepaying the loan.

💡 The Takeaway

Being debt-free feels good — but financial decisions shouldn’t be driven by emotion alone. It's crucial to evaluate:

• The cost of debt

• Potential returns on investments

• Your long-term goals and liquidity needs

At TrueX, we help clients see the bigger picture. Sometimes, staying the course with a home loan — and investing surplus funds wisely — is the more rewarding path to financial freedom.

💡 Facing a similar dilemma? At TrueX, we help professionals make smarter, stress-free financial decisions. Let's talk.

When Land Investment Becomes a Financial Trap

Anuj (name changed), with an annual CTC of ₹25+ lakhs, made a high-stakes financial decision to buy a plot of land, believing it was undervalued and likely to appreciate significantly over the next five years. This decision was also strongly influenced by family expectations.

💸 The Financial Misstep

• Funding Challenge: Banks typically don’t offer loans for land purchases. To bridge the gap, thus Anuj took a personal loan of ₹18 lakhs at 10.5% interest, a high-cost borrowing option.

• High EMI Pressure: The monthly EMI significantly reduced disposable income, making it difficult to save or invest elsewhere.

• Investment Did Not Perform: Contrary to expectations, land prices remained stagnant due to a slowdown in the real estate market.

• Illiquidity: The land couldn’t be easily sold to recover the money, leaving the employee stuck with an illiquid asset and mounting debt.

• Emotional Toll: The financial pressure created stress, uncertainty, and a feeling of being trapped.

  
  

🚩 Key Learnings

This is a classic case of:

• Mismatch between investment liquidity and loan obligations

• Lack of guidance on risk, return, and loan structuring

• Decision driven more by emotions and external influence than by financial prudence

  
  

✅ How TrueX Helped

🔄 Loan Restructuring

• Reduced Interest Costs: Replaced the high-interest personal loan with a loan against property, cutting borrowing costs.

• Increased Tenure, Lower EMIs: Extended the loan tenure to ease monthly repayment pressure.

  
  

📈 Improved Liquidity and Investment Planning

• Redirected the freed-up cash to a mix of SIPs in debt and equity funds.

• Built a buffer for emergencies and a structured plan for loan pre-payments.

  
  

💡 Facing a similar dilemma? At TrueX, we help professionals make smarter, stress-free financial decisions. Let's talk.

Immediate to medium-term financial planning

Over the years, there has been an uptick in Indian consumers’ spending habits. From Millennials to Gen Z, there's a growing desire for new experiences, a serious attitude toward hobbies, and an aspiration for a better life overall. 

This has led to a surge in the market of financial tools that help people decide how much to save, spend, or splurge. 

The markets were running high for the past 2 to 3 years from 2021 to the start of 2024, however, the last 18 to 20 months have made us take a hard look at the bull run with the geopolitical scenario. 

Trends that were once soaring are now being questioned, and the consumer sentiment has reached an all-time low. 

In this article, we will share how to manage & work on our short to medium-term goals, typically ranging from 1 to 5 years. This can range from planning a holiday to buying a vehicle. 

Type of Funds 

• A debt fund is a type of mutual fund that invests primarily in fixed-income instruments such as government securities (G-Secs), corporate bonds, treasury bills, commercial papers, certificates of deposit, etc.

  • Benefits: lower risk than equity but better returns than FDs, can be withdrawn faster than an FD, and is a good form of investment for a few months to 3-5 years. Works well for short-term investment. If held for 3+ years, you get indexation benefits on capital gains.

• Hybrid funds are mutual funds that invest in a mix of equity (stocks) and debt (bonds). Think of them as the best of both worlds – they aim to provide growth through equities and stability through debt.

  • Benefits - for those who are new to investing, have a medium risk appetite, are planning to buy a house in 5 years, or build a retirement corpus,  diversified across assets. Think of investing for 3 to 5+ years 

• Index funds are a type of mutual fund or ETF (Exchange Traded Fund) that mirrors a specific stock market index like the Nifty 50, Sensex, or Nifty Next 50. It passively tracks the index, meaning it invests in the same companies in the same proportion as the index.

  • Benefits - long-term market growth, results are better received in 5+ years, focused on building a corpus, ideal for SIPs & beginners

Tax Implications and Exit Charges

While investing for short - medium term goals, its crucial to factor in the tax implications and exit load to ensure the goal amount is fully met.

Debt Fund -> Capital Gains are taxable as per your income slab. Exit loads maybe applicable for short duration redemtpions of less than 6 months.

Hybrid Funds -> Upto 1.25L per year of capital gain is tax free. Most of the funds have an exit load of 1% if amount is redeemed within 1 year of investment.

Index Funds -> Upto 1.25L per year of capital gain is tax free. Most of the funds have no exit load.

Ready to plan your next goal? Use TrueX goal planner or connect with our advisor