Home Loan Prepayment Vs Investment in PPF

POSTED BY roshan ON January 8, 2014 1:43 pm COMMENTS (15)

I am 37 years old with an outstanding home loan of 23.65 lakhs at rate of interest of 10.25%. I am having some surplus cash of 1.5 lakh as a result of a bonus i would get. I am confused if i should

a)prepay the home loan with 1.5 lakh

or

b) Invest 1 lakh in ppf in april 2014

I have a low risk appetite and hence would not like to invest in MF at least till my home loan is cleared

  • 15 replies on this article “Home Loan Prepayment Vs Investment in PPF”

    1. ashalanshu says:

      Dear Vz, please open your PPF account now. you ‘ll get the benefit of completion of 15 FY, 1 year early. Also you ‘ll get ibnterest for 2 months as of now in FY 2013-2014.

      Thanks

      Ashal

    2. ashalanshu says:

      Dear Vz, in my personal opinion, start investing more for your retirement now on wards to cover up the lost time.

      Thanks

      Ashal

      1. vz1hrp says:

        Hello Ashal,

        Should i open a PPF account between Feb 1 -Feb 5 or should i open the PPF account between April 1- April 5 so that i get interest benefit for entire year as opposed to 2 months only? I plan to invest maximum amount in one go.

        Thanks

    3. ashalanshu says:

      Dear Vz1, may I know how old your loan is?

      thanks

      Ashal

      1. vz1hrp says:

        Hello Ashal,
        I had bought an under construction apartment. Original loan amount sanctioned was 3167000. I had taken a repayment holiday of 18 months. The pre-emi interest + loan repayment holiday then made loan amount principal to 3650000. My first emi started in june 2009. I have been aggressively prepaying any surplus funds(matured NSC’s,bonuses,few FD’s) and as of today outstanding loan amount is 2365000. Hence was wondering if i still need to prepay or is time for me to start divesting surplus funds(PPF + prepayment). As mentioned i have a low risk appetite. Other retirement savings i have are EPF,Superannuation & Gratuity. Will start investing in VPF once direct tax code is implemented

        Thanks

    4. rahul123 says:

      Policy change can happen to any financial investment….Equity/MF /PPF anything…we don’t know whats there in future.

      Thanks,
      Rahul

    5. rahul123 says:

      Vz1hrp,

      I think, this is the right time for you to plan for your retirement.

      I will advise you to open an PPF account (lockin period 15 years) and invest Rs 1,00,000 (max limit). and use 50000 for prepayment.

      Even thouhg the interest which you will get from ppf is less than home loan rate, i believe the first priority should start investing for retirement. Every year keep invested extra amount (like bonus,surplus) in ppf , exhaust the 1,00,000 limit and then only think of prepaying the loan with remaining money.

      Home loan is not a bad loan (like credit card/personal loan). Please set a realistic goal to get over it. No need to hurry 🙂

      Thanks,
      Rahul

      1. vz1hrp says:

        would PPF still be tax free once Direct Tax Code is implemented?

    6. Syamantak says:

      Pattu created an awesome calculator for the dilemma – whether to save or to pay off debt

      please use below link for further information :

      http://freefincal.com/loandebt-calculators/pay-off-home-loan-or-invest-for-retirement-calculator/

      1. vz1hrp says:

        Thanks a lot. I will look into this

      2. vz1hrp says:

        I read this. Does it make sense to diversify? i.e half money in ppf and half for prepayment?

    7. Raja says:

      I think it is better to clear your liability which takes away interest at 10.25% rather than invest it for 8.5% gain. You will save more in terms of interest lost than the interest which you will gain. Also money will get locked into PPF

      1. vz1hrp says:

        Thanks Raja. That was my thought too. I will be saving lot of interest if i make a prepayment

    8. rahul123 says:

      What are your other savings and how are you planning for your retirement?

      Thanks,
      Rahul

      1. vz1hrp says:

        Regarding retirement planning->I just have my superannuation and EPF. I am planning to start contributing for VPF next financial year

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