Pay off your home loan early or invest that money? Here’s how to decide

Prepayment also brings emotional relief: owning your house outright means fewer monthly obligations and more financial breathing space.

Every homeowner faces this question at some point or another: do you invest more money in your home loan to pay it out early, or invest and let it compound? There isn't a one-size-fits-all solution, because the wise thing to do is based on the rate of interest on your loan, your risk tolerance, and what you'd like your money to be accomplishing for you in the long run.

If your home loan carries a high interest rate — say, above 9 percent — prepaying can be a great move. The guaranteed return from reducing your interest outgo often beats what you’d earn on a fixed deposit or a low-risk investment. Prepayment also brings emotional relief: owning your house outright means fewer monthly obligations and more financial breathing space. It’s especially worth it if you’re nearing retirement or dislike carrying debt.

If your home loan interest rate is rather low — for example, 7 percent or less — and you are comfortable taking some risk, investing can help you achieve better returns in the long term. Equity mutual funds, for example, can provide you with 10-12 percent average return per year in the long term, creating more wealth than you'd save by prepayment. This plan will be appropriate for you if you have a regular income, an emergency fund, and sufficient insurance against risks.

Figures aside, peace of mind matters. Some sleep better knowing they owe nothing, even at the cost of higher returns. Others prefer to have their money ready and invested, especially if they're financially prudent. The key is to choose what gives you a sense of security, not anxiety.

You don't have to go whole hog on one or the other. You can borrow and prepay smaller lumpsums occasionally, say once or twice a year, and keep investing in regular intervals. You are able to reduce your loan tenure without sacrificing compounding advantage through long-term investing.

If you've got a high home loan interest rate, prepaying is a conservative way to be frugal. But if your rate is low and you can earn more elsewhere, careful investing can benefit you more. It's ultimately not just about numbers — it's about balance. Being debt-free is great, but so is watching your money grow.