Home loan closed? 5 smart ways to use your surplus EMI money for insurance, retirement and emergencies

If your home loan is paid off, and you don’t want to take another loan so as to repeat the ‘earn-EMI’ cycle (to buy the next property), you will have surplus money each month as there is no loan to service equated monthly instalments (EMIs) for. What should you do? If you prioritise being loan-free, consider the points discussed below.

Emergency, contingency funds

Emergencies do not wait for you to have an emergency fund. So if you never got a chance to put up a proper emergency fund in place, now you should. The thumb rule is having at least six months’ worth of expenses as buffer. If you have many dependents, and/or work in an industry where job security is questionable, have a bigger emergency fund—something like 9-12 months’ worth of expenses.

If there are elders in the family, who increasingly require more expenditure on out of-hospital medical expenses, have some extra saved up for them as well, which is generally referred to as a ‘medical contingency fund’.

Eliminate high-interest loans

If you have other loans (like unsecured personal loans) or credit card outstandings with very high interest costs, start repaying them fast with the freed-up home loan EMI money.

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Get adequately insured

If you are under-insured when it comes to life and health insurance, use the surplus to correct the situation. Don’t rely on just office insurance. It is best to have (term) life cover and health cover of your own as well.

Investment towards retirement

The next step is to invest aggressively for the future. People often get emotional about closing their home loan early and start using a majority of their funds to aggressively pay off this obligation. However, if the loan is done with, you can address your savings and investments.

The surplus amount can be redirected towards long-term financial goals. Suppose a 45-year-old pays off their home loan which had an EMI of Rs.75,000. Once basic hygiene (emergency fund, insurance, etc.) is taken care of, this money can be redirected towards future investing: both medium-term (child’s education) and long-term (retirement). Based on financial planning calculations, this person can figure out how much to invest for both the goals and in what asset allocation.

For medium-term goals, investing in a mix of equity and debt is fine (via something like hybrid funds). For long-term goals, invest in equity funds via monthly SIPs to complement automatic debt investments being made in provident funds/NPS, etc. via salary deductions.

Still repaying home loan?

If you’re still repaying your home loan and are years away from being debt-free, here is a simple maths-based approach to close your loan quickly—assuming you want to prepay your loan fast*. First, try and pay one extra EMI each year. Second, to try and raise your monthly EMI by 7-10% each year. Combine both steps and a 25-year loan can be cleared off in about 10 years or so!

*This approach is for those who want to clear off their home loan quickly due to the psychological charm of becoming debt-free. But there’s another view: as home loans are very cheap on a post-tax basis, why prepay? If you subscribe to that view’ you don’t want to close your home loan quickly.

The Author is Founder, Stableinvestor