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Choosing Between Prepaying Your Home Loan or Increasing Your SIP After a Salary Hike: Expert Advice


When faced with a substantial salary increase, many salaried individuals grapple with the decision of whether to use their newfound income to prepay their home loans or to boost their monthly mutual fund SIP (Systematic Investment Plan) contributions. It’s a common dilemma that arises after a job change promises a higher paycheck and financial opportunities.

A reader recently sought financial guidance from FE Money, seeking clarity on whether he should prioritize closing his home loan or ramping up his SIP investments. This individual, who had recently switched jobs and received a generous 40% salary increase, was wrestling with this important financial decision.

This individual had initially borrowed Rs 50 lakhs for a home loan with a 28-year tenure and had been paying approximately Rs 45,000 as his monthly EMI for the past two years. In addition to his home loan commitment, he was diligently investing Rs 10,000 every month in a mutual fund scheme through SIPs.

Viplav Majumdar, a Certified Financial Planner and Director of Planyourworld Training Academy, provided valuable insights to address the reader’s query. Majumdar recommended prioritizing the increase in SIP investments, emphasizing the potential for higher returns in the long run. He argued that equity investments typically yield better returns than the interest paid on a home loan, making it a more financially savvy choice.

Majumdar further explained that by choosing to prepay the home loan first, the individual would incur a financial loss over time. This loss would become apparent over a decade, as the individual’s net worth would be lower compared to the alternative of increasing SIP contributions. The core principle, Majumdar stressed, is to aim for a return on borrowed money, particularly when the interest on the loan is lower than potential returns from mutual funds.

In conclusion, Majumdar advised the reader to prioritize increasing SIP contributions, which would not only provide the potential for higher returns but also maintain liquidity. This liquidity could be used to prepay the home loan at any point if desired. To maximize returns, Majumdar recommended choosing mutual funds wisely and opting for Direct plans, which could yield an additional 1.5% in returns annually, ultimately accelerating wealth accumulation compared to traditional bank or agent-based investments.

Disclaimer: The views and suggestions mentioned above are those of the respective experts/commentators and do not necessarily reflect the views of It is advisable to consult a financial advisor before making any investment decisions.