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POSTED BY ON January 31, 2012 12:42 pm COMMENTS (10)
Hi Manish/Experts,
I have taken a home loan of 15 lacs from Axis Bank and the emi I am paying is approx 14k for 19 yrs.
At the moment, my ROI is 11.5%.
Also, there is no pre-closure and part-payment charges.
It’s been almost 1.5 yrs, since I paid my first emi.
Couple of months back, I made a part-payment of Rs1.3/-Lakh.
Now, I am thinking of what would be the best thing to do for me:
1. Should I try and make (whenever possible) part-payments and try to pre-close the loan?
2. Should I increase my emi to Rs.22k (it’s affordable for me). I’ll still try to make part-payments, but it’ll be less frequent since I’ll be increasing my emi.
3. Should I do both of the above things?
4. Should I invest the amount (whichever I try and save) somewhere like mutual funds/FD/RD?
At the moment, apart from a term insurance plan, I have no other instrument for savings.
Although, my wife is doing some investments (ICICI Pru Life Stage and PPF).
Any useful suggestions will be appreciable.
Thanks.
Kapil.
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Dear Kapil, you may keep remaining amount in the liquid funds of the AMCs where you ‘ll invest in Eq. funds.
For example, you ‘ll start investing in HDFC Top 200 (an Eq. fund) later on. In this case the choice of debt fund ‘ll be HDFC High Interest Fund Short Term Plan.
Similarly you may decide from Quantum or Franklin or DSP AMCs. For a start you may keep all the money in HDFC fund only.
Once there is sufficient money as emergency funds, you may start weekly or mly STP from these liquid/debt funds to the Eq. funds of the same AMCs.
Thanks
Ashal
Dear Kapil, initial amount say 1L or 1.5L Rs. may be kept in the SB account linked sweeping FDs. For amount more than this, you may keep in liquid funds.
Thanks
Ashal
Ashal – Can you suggest me some liquid funds? My requirement for emergency fund is approx 3 lacs. I already have approx 1.5 lacs in Savings. I shall be starting up a RD to accumulate rest of the funds for emergency. Where do you suggest me to park the rest of 1.5 lacs?
Dear Kapil, as you were short on emergency & other funds, that’s why I have asked you to first create the same & not to think for prepay at this point of time.
Thanks
Ashal
Thanks Ashal. I sincerely appreciate your suggestion.
Where do you suggest should I keep my Emergency fund, once I have accumulated it to the desired amount?
I am confused. Let me collate my understanding and ask few more questions.
What I have got so far is to NOT think to prepay my home loan.
Dear Kapil, your current EMI is 14K & you may increase it to 22K. My view open a simple product like bank RD of at least 1Y & divert this 8K extra amount in to RD. At the end of 1Y, you w’d have some 1L Rs. at your disposal. Treat this as your emergency fund. Try to increase this to your 6Month expenses level or even more.
In between if you do have some surplus, first create the emergency fund of that 6M expense + this RD & later on divert the 8K money to invest in Eq. MFs & others. For in between lump sum amounts received as bonus or incentives etc. use these to prepay.
Here I assume you do have adequate Term & health cover.
Thanks
Ashal
Yes, I too agree with Ramesh. see in Home loan, your principal amount is always decreasing but if you do investment you principal amount will always increase.
My suggestions,
1. Do not (NEVER) prepay your home-loan. The reason being whether you default in the 3rd year or in the 10 year, the house is bank’s property and the bank will sell the house plus ruin your credit score. By prepaying your home loan, you are only decreasing the risk of your bank without any benefit for you.
2. As mentioned, you do not have any other nests/assets. So the better thing is that you should start building those, one for emergency, other for retirement and so on. Whether you do it by investing in debt or equity or balanced is a different thing.
3. The amount which you can pre-pay will be better utilised in creating other assets for you. And since you do not feel the EMI burden (as per your words), you should not be worried about that. Eg, you could have kept that prepayment amount as a 6 month reserve of EMI.
4. Do not compare the long-term equity returns with the home-loan EMI (after you have bought it). This discussion is better done before buying a house.
As mentioned quite a number of times, you should be doing these things:
1. Term insurance (already done, good). Just check whether that is a sufficient amount.
2. Emergency funds (for your own monthly basic consumption and EMI).
3. Health Insurance.
4. Set aside some money (so instead of increasing the EMI), start some SIP into MF or FD/RD whatever you are comfortable with. Some good names of MF according to slabs:
i) Pure Equity – Fidelity Equity / HDFC Equity / Quantum Long Term Equity / Templeton Prima Plus.
ii) Balanced – HDFC Prudence / Templeton Dynamic Ratio FoF
iii) Debt – Templeton Income Opportunities / Templeton Corporate Bond Oppor / HDFC MIP – Long term.
Hope this helps you.
Ramesh
Since we will never know if we are in end of interest cycle or in the beginning.We can never speculate about interest rate
Take below scenarios
1. What happens if you decide to invest in equity and your Home Loan ROI goes to 14%
2. What will happen if you loose your jobs in future ?
Just ponder on the risks your going to take and decide
My suggestion will be
Pay as much as you can as repayment.
If your comfortable in increased EMI please do it.
Your current ROI is 11.5%. Traditional assumption from equity MF is 12%. Ask yourself is the risk your taking worth 0.5% interest you are going to get.
At same time do remember to save and invest for future.
Beyond this as a person with Home Loan you should have below things in place before going for anything
1.Term Insurance cover which includes your home loan.
2. Emergency Fund for 6 months which includes your monthly expense including (EMI,Insurance payment ,investment(optional))
3. Individual Health Insurance