Salary hike or bonus in hand: Should you invest for returns or repay your home loan?

A salary hike or bonus often feels like a reward, but it also brings a tough choice. Should you invest it to grow your wealth or put it towards repaying your home loan faster? Let's find out here.

In Short

• Bonus use decision depends on individual financial goals
• Compare after-tax loan cost and investment returns
• Younger people may prefer investing, older ones prepay loans

A friend called me last month, sounding both excited and confused. He had just received a bonus at work. “I should be happy, right?” he laughed. “But now I don’t know, should I invest this money for better returns or use it to repay my home loan?” It’s a good problem to have, but also a tricky one. Because the answer isn’t as obvious as it seems.

IT’S NOT JUST ABOUT NUMBERS

At first, the decision looks simple, i.e., compare your home loan interest rate with market returns. If investments promise more, go that way. But there’s more beneath the surface.

Adhil Shetty, CEO of BankBazaar, explains, “The only meaningful comparison is between what borrowers actually pay after taxes and what they would actually earn after taxes. Everything else obscures the picture.”

With tax benefits on home loans shrinking under the new regime, the real cost of borrowing has quietly increased. That changes the calculation for many borrowers.

YOUR AGE CHANGES THE ANSWER

What works for a 30-year-old may not work for someone closer to retirement. Younger professionals have time on their side. Market ups and downs are easier to handle when you have decades ahead.

Shetty puts it clearly, “A 30-year-old has 30 years of work ahead and time to recover from market downturns, so stocks make sense and prepayment can wait. A 50-year-old nearing retirement wants to eliminate loan payments before income stops, making prepayment smarter.”

Vijay Raundal, Managing Director at Teerth Realties, adds, “Younger borrowers with stable incomes and long investment horizons can afford to invest surplus funds. People nearing retirement often prefer early repayment for financial security and peace of mind.”

WHEN PREPAYING FEELS RIGHT

There are situations where reducing your loan is the safer and smarter move. If your interest rate is high or your income isn’t very stable, prepayment can reduce stress.

Hardik C Shah, Director at Shyam Group-Dholera, says, “Early repayment makes more sense when the home loan interest rate is high, investment returns are uncertain, or the borrower values financial security over higher returns.”

Also, timing matters. In the early years of a loan, a large part of your EMI goes towards interest. Prepaying during this phase can save you a significant amount over time.

WHEN INVESTING CAN WORK BETTER

On the flip side, investing your surplus can help you build wealth, if you stay patient and disciplined.

Shetty gives a practical perspective: over a long period, equity investments can generate higher returns than the interest you save through prepayment. But there’s a catch, you need patience and the ability to stay invested during market dips.

Raundal adds that investing works best “when expected long-term returns clearly exceed the actual cost of the home loan.”

WHY BALANCE IS OFTEN THE SMARTER CHOICE

For many people, the best approach is not choosing one over the other, but doing both and finding a balance.

Sandeep Mangla, Managing Director at Forteasia Realty, suggests, “Borrowers can maintain their SIPs for long-term goals while making partial prepayments on their home loan. This balanced approach helps reduce debt while building wealth.”

Using bonuses or salary hike for part prepayment while continuing regular investments can offer both stability and growth.

DON’T FORGET THE RISKS

Investing instead of prepaying comes with risks, i.e., market volatility, poor timing, and the chance of needing money during a downturn. On the other hand, focusing only on loan repayment might limit your wealth creation.

As Shetty cautions, the biggest mistake people make is not doing the maths properly and letting emotions guide their decision.

SO, WHAT SHOULD YOU DO?

There’s no single right answer. If you value peace of mind and certainty, prepaying your loan may feel right. If you have time, a stable income, and a higher risk appetite, investing could help you grow your money faster.

For my friend, the answer wasn’t black and white, and that’s the point. The right decision isn’t about what’s popular, but what fits your life. The smarter move is not about choosing one path, but about choosing what fits your life best.

- Ends