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POSTED BY ON January 7, 2014 10:15 pm COMMENTS (7)
AM IN 30 % TAX BRACKET
1. I HAVE 5 LAKH FD WITH 10 % INTEREST WITH BANK THAT WILL MATURE AFTER 3 YRS.
2. I’VE HOME LOAN OF 16 LAC PRINCIPLE AMOUNT REMAINING TODAY TO BE PAID OVER 170 mths .
now i want to prepay home loan , should i break FD or use money from my salary to make prepayment . as i need another home loan after 1 yr of around 20 lac
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Dear DrShiv, why do you want to go for another loan in next 1Y without closing the current one?
Thanks
Ashal
Hi,
If I would have been your place, I would have first opted for a shifting my loan to another bank to reduce the interest rate. Since you are in 30% tax bracket and your house is also on rent, suggest you continue with the home loan to avail tax benefit.
If you move to a lesser interest rate say 10.25%, you may end up reducing the tenure to 150 months (from 170 months) keeping the EMI almost same. An interest saving of about 3 lakhs (after paying the takeover charges) over this period and its not a small amount. In fact you may get a better interest rate since the principal outstanding is less than 25 lakh. In case you can afford to increase your EMI, do that to reduce the loan tenure further. By increasing you EMI by another 2000, you can save interest of about 4.75 L @10.25% rate.
As suggested keep the 5 lakh as safe guard money or to pay your share for the next home loan.
Ashish Garg
I think the answer to your question depends on:
1. Whether the existing HLoan is for Self Occupied house or Rented Out house
2. Difference in HL interest rate and FD int.rate.
In my view, if your HL is for Rented Out house, its Better to keep FD.
existing loan is 11%, house is Rented Out as it was ready possession flat , and FD is with 10 % , am living in another city in ancestral house so am confused
To add, when you require the second home loan in future, you will require atleast 20% of the property value for downpayment. This 5L can come handy in that case. Otherwise if you do not need money for emergency, its always better to get rid of your liabilities
While technically speaking Sumit is right in his analysis, however, if you foresee any emergency or need for some extra cash in the ‘near’ future, it’d make better sense to live with a home loan of 10% than with a personal loan of ~16% or a credit-card loan of ~40%…
Depending on the that scenario, I’d continue w/o any changes if the EMI isn’t hurting or, to be sightly better off, pay up part of the principal…
There is no point in having a FD with 10% interest (where 30% of interest will be tax deducted, so effective 7%), and paying home loan EMI where interest rate in much higher than your FD rate. SO I think you should prepay home loan with FD amount.
Thanks
Sumit