Home loan Suggestion

POSTED BY Dominic Prakash ON November 28, 2010 11:00 am COMMENTS (7)

I have a home loan outstanding amount of 34 lakhs and I have 25 lakh as liquid in the same loan account. Its a Smart home loan where my liquid deposits also earns the same interest (11.25%). Do you think its a good idea to pump 9 lakh more and make it a interest free loan. It is like closing my home loan without any penalty.

In this case I may NOT be able to claim the 3 lakh (1.5+1.5 each me and my wife) interest in IT.

Appreciate your suggestions.

7 replies on this article “Home loan Suggestion”

  1. Dominic Prakash says:

    Thanks for your email. I am aware of VIP currently I am doing with one of my Benchmark S&P 500 MF. I am in the learning phase whole financial planning thing and I am interested learn more. Let me know your suggestion.

    Best Regards
    Dominic
    dominic dlink org

  2. shashank kashettiwar says:

    Dominic,
    I can suggest you some strategies on utilising this large corpus in a effective way.

    At present if you are doing SIPs in MFs, it is as good as making STP. The possible weighted average return on the whole portfolio would depend on the ‘speed’ at which the investments are being done.

    Have you thought of VIPs as the strategy apart from SIPs? You have enough corpus in hand to try it out. Works better than SIPs.

    I have some other suggestions also if you wish to know!!!!!!!!1

    shashank

  3. Dominic Prakash says:

    Shashank,

    Thanks a lot for your response. All my MF SIPs are going from this account and I’ll look for other investments that will provide more than the home loan rate (actually its is 12.25) and safe.

    Thanks for your time.

    Regards
    Dominic

  4. shashank kashettiwar says:

    Dominic,
    Sorry, my reply got delayed.

    If you examine closely then it becomes obvious that smart home loan account should not be used to park heavy amounts at all like you have done. Because it is akin to prepayment of loan. This a/c should be used more as a resting spot for money till it is invested in a avenue fetching returns which are more than the effective interest rate you are paying to the housing loan company.

    1)So parking such undecided destination money
    2) Emergency/Contingency Fund money
    3) Opportunity grabbing money

    or any temporary parking should only be done. Otherwise you would be losing the whole leverage which a hsg loan opportunity can give you.

    Not advisable for a savvy investor like you at all.!!!!!

    shashank

  5. Dominic Prakash says:

    Thank you Shashank,

    Just to clarify further.

    This is not actually a FD. This is a unique home loan called “Smart home Loan”. Here if you take a home loan of 100,000 and you have a savings of about 60,000 in the same account then the interest part of EMI will be calculated for the remaining 40,000.

    Suppose I got a loan of 100,000 and I have a deposit of 100,000 in the same account then my whole EMI will be taken as principle and NIL interest. Actually it will become an interest free loan. I can still make use of the I00,000 if required.

    http://www.hsbc.co.in/1/2/personal/loans/smart-home
    http://www.hsbc.co.in/1/2/personal/loans/smart-home-savings-for-20-years

    You already kind of answered my question. We are (both together) saving about 90,000 by paying 300,000 interest to the bank. If I push another 900,000 then it will become an interest free loan and I’ll be paying 90,000 as IT and I’ll be saving 210,000. Hope my understanding is right

    Regards
    Dominic

  6. bharat shah says:

    i am not an expert. however common sense suggests: better have status quo till you earn same on fd as your loan interest rate. you should ensure that you and spouse lives got insured for the loan a/m. outstanding. you should also see the tax code to be effected from f.y. 2012-13.

    1. shashank kashettiwar says:

      Dominic,
      Keeping the money in any other investments instead of paying off the home loan depends on the leverage you are able to extract from this alternative investment. In your case this is a FD fetching same intt as your loan company is charging. Let’s examine the scenario. I assume that both of you are in 30% tax bracket.

      Effective intt amount on your home loan is :
      34,00,000*11.25% – tax saved on 3,00,000( i.e. @90,000)
      = 3,82,500-90,000 =2,92,500 So the effective loan intt rate = 2,92,500/34,00,000 = 8.60%

      This effective intt rate will keep on falling and will reach 7.875% as the principal amount keeps on reducing and the intt part comes within the permissible maximum of 150000+150000 as per the tax laws applicable today.

      Now what is the effective intt rate you are getting on the FD?
      Effective intt rate on FD : 11.25 – 30% of 11.25 = 7.875%

      So as of today there is no leverage available by parking the money in FD. Nor any future benefit is going to be available even when the home loan effective rate comes down to 7.875%. Now this is an obvious fact but I’m showing the calculations just to make the issue crystal clear.

      If you plan to put that 25 lakhs In some other higher yielding investment where the post tax returns are more than 8.6%, then only it will be sensible to continue with the present strategy.

      How to choose alternative strategies is a topic of separate discussion.

      shashank

      .

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