Home Loan Prepayment or Investment in FD ?

POSTED BY amitgehani_143 ON October 23, 2013 9:34 am COMMENTS (3)

ear Manishji,

Hi, I searched several websites to get the answer for my query but the same were confusing.

My details is as under:

Home Loan Amount : 2375000

Original Tenor : 240 months

Paid Tenor : 146 months

Pending Tenor : 94 months

EMI Amount : 30000/-

I am in the highest 30% tax bracket.  Currently am saving 1 lac in 80 C & 1.5 lac deduction under Sec 24 (b) by having this home loan.

I have an extra fund of 2 lac available which I am thinking as to whether to pay back and reduce the loan tenor

OR

Invest this money in FD / you can suggest some investment option for a longer period.

Ideally I believed that if I am investing at FD (the net return would be 30% lesser of 9.25% rate of interest i.e. effective interest is around 7%) and my home loan rate is 10.4%….so its always advisable to payback the loan as its on a higher interest…………but some of the websites suggested that its not a better idea to payback the loan…..ideally the money should be invested as the overall returns will be higher……..they are considering the difference of present value of money and future value of money.

I am really confused.

Would request you to kindly help me out.

Thanks and Regards,

Amit

3 replies on this article “Home Loan Prepayment or Investment in FD ?”

  1. Ashish Garg says:
    October 24, 2013 at 5:12 pm

    Hi Amit,

    If I would have been in your place, I would looked at repaying the loan. This would reduce your loan tenure by about 12-13 months (considering your EMI is 30K). An overall saving on interest of about Rs.1.65 lakh over 5 years. Also, this will not reduce your eligibility to claim sec 24(b) benefit by much. Instead of Rs.1.5L you may get to claim about 1.35 ot 1.4 L. Technically you end up paying 3300 as additional income tax.

    Also, If you choose to invest this amount in FD, you are not gaining anything, but actually at a loss.

    Ashish

    Reply
  2. ashalanshu says:
    October 23, 2013 at 11:37 am

    Dear Amit, your query has financial aspect as well as emotional aspect. financially, you should invest the 2L Rs. amount to earn a return higher than your Home loan. emotional aspect, you should close the loan ASAP.

    Pick the one, you are more comfortable with.

    Thanks

    Ashal

    Reply
  3. Credexpert says:
    October 23, 2013 at 11:32 am

    Dear Mr. Amit,

    You need to consider the gain from both options before making a decision. By using the funds towards your home loan, you will save on interest for the year. This should be considered as a gain. And if you invest in FD, the interest received, as you mentioned should be taken after considering tax.

    This article in the economic times, may give you a better idea on the things to consider in your case: http://articles.economictimes.indiatimes.com/2013-10-21/news/43250665_1_home-loan-education-loan-housing-loan

    Regards,
    Credexpert
    http://www.credexpert.in

    Reply

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