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POSTED BY ON August 20, 2011 1:02 am COMMENTS (2)
I have 8.5L home loan pending and current interest rate is 11.75%. I have 3L liquid funds in hand. Please advise me on the following ideas:
1. Is it advisable to pre-pay 3L and reduce the loan amount?
2. Is it advisable to keep the same loan mount and pay EMI(remaining tenure is 42 months) and take the IT-Tax benefit on home loan and invest this surplus of 3L in a fund that gives better returns(12% to 15%)?
TIA
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Prepay those 3L and reduce your premium 8.5 to 5.5L. This would not only reduce the principal but also the term of your loan if you keep the EMI at the same level as now.
Remember your Debt is costing you already 11.75%. Now are ready to take risk to earn 12%(conservative expectation) ie just 0.25% extra . Is that going to make a real difference to you?
In a short term like 42 months you can’t expect returns in range of 12% CAGR.
Prepay the 3L and continue with your regular investments(SIP etc).
Dear Advait, My take ‘ll be to prepay 2L Rs. in your home loan & invest remaining 1L Rs. in your choice of funds. This ‘ll protect you in both ways – In case the interest rate of your home loan still increases from the existing rate, you ‘ll save a substantial sum due to prepayment of those 2L Rs.
As you are investing 1L Rs. in your choice funds, you have the potential there to earn some meaningful return over the end of your home loan term or even early than that.
I’m not talking in terms of Tax benefit as the benefit is going to come with each passing day due to continuously decreasing outstanding loan amount.
Thanks
Ashal