Confusion regrading Home Loan Prepayment and Investment in PPF with surplus income

POSTED BY vijaypopat88 ON April 1, 2014 10:30 am COMMENTS (10)

Hi,

I have a Home Loan from SBI of 20 lacs for 30 years (360 months )@ 10.15% interest. EMI comes to around 19070 after taking all cost into consideration (Loan Insurance as well ). I am paying extra 6000/- EMI i.e: 25070/- per month to add 72000/- annually to the principal prepayment thus trying to reduce the tenure of loan. At my current income level paying 25070/- EMI is not an issue for me and I can afford this burden easily with my other monthly expenses and liabilities.

My question is that I have extra surplus 100000/-, what should I do, should I go for Prepayment of this loan or invest the same on ongoing PPF @ 8.7% interest. My age is 26, I am not looking forward for tax saving as homeloan is solving the issue, I opted PPF as I find it safe and easy tool for retirement planning. I am not that kneen in investing in equities or mutual funds. I am confused as the annual return is less than annual interest I am paying. Looking at my age and other factors please advise what is suitable step.

10 replies on this article “Confusion regrading Home Loan Prepayment and Investment in PPF with surplus income”

  1. Anshul Gupta says:

    72 months reduction in EMI is coming only due to 1l lump sum payment. I haven’t included 6k extra EMI

  2. ashalanshu says:

    Dear Anshul, the 72 months reduction in loan term is coming from 2 prepayments 1L lump sum as well as 6K extra EMI. I want you to calculate the impact of 1L lump sum only. No extra 6K EMI.

    Thanks

    Ashal

  3. Anshul Gupta says:

    Dear Ashal,

    I am not getting your point. Do you mind attaching a spreadsheet ?

    Regards,

  4. ashalanshu says:

    Dear Anshul, you need to calculate for basic EMI not for increased EMI for the fact that reduction in loan term is coming from both 1L Rs. one time prepayment as well as 6K extra money mly. So to get benefit of 1L Rs. we need to consider only basic EMI. Hope it clarifies to you something what I mean.

    Thanks

    Ashal

  5. Anshul Gupta says:

    As per my calculation, if EMI is kept same then around 72 months of EMI will be reduced saving around INR 12 lakh of interest whereas if 1 lakh is kept in PPF for 25 years it will become 8.5 lakhs

    What does the figure come for you ?

    Thanks

  6. ashalanshu says:

    Dear Anshul, please check the interest saved in Home loan by repaying 1L Rs. now and check the interest earned in PPF over the next 20Y. Tell me the result of your calculations.

    Thanks

    Ashal

  7. ashalanshu says:

    Dear Vijay, did you disclose the requirement in original query? How can I imagine the thing. You change the goal post and thus I’m changing the answer. Do not opt for loan repayment or PPF. Keep the amount in bank FD and use the same for your actual need next year so that you do not ask for more loan from SBI.

    Thanks

    Ashal

  8. Anshul Gupta says:

    Ashal,

    Won’t it be better if he makes a part payment ? He’ll save a lot of interest as in initial years lot of interest is charged.

    Thanks,

  9. ashalanshu says:

    Dear Vijay, invest in PPF.

    Thanks

    Ashal

    1. vijaypopat88 says:

      Hi Ashalanshu,

      Thanks for the straight anser for the confusion but just want some more light on following case.

      I would be needing extra 10 -15 lacs of loan as renovation cost loan or top up home loan by next year. As I have existing home loan from SBI will have to go for SBI Equity home loan ( @ 1% extra then current home loan rate for same tenure )as going to others lending company will fetch me extra paper work. Now the catch is they sanction the 75-80% of project cost based on then current market value of property minus outstanding loan amount. Thus in that case should I still opt for PPF or go for prepayment of loan.

      The answer seems staright forward but I want some feed back about SBI equity loan and other options available in market for renovation loan at cheaper rate.

      Thanks

      Vijay

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