Pay off house loan or invest?

by Manshu on January 10, 2012

in Personal Finance

Sandriano made a comment the other day with a question as to whether it’s better to invest in the NHAI bonds at 8.2% or pay off housing loan at 9%.

My response was that it’s probably better to pay off the housing loan if all your EMIs consist of mainly interest right now, but if that was not the case then we’ll have to look at it in more detail. He is in a stage where bulk of the EMI still consists of interest, and here’s how his loan looks like right now.

Thanks always for your inputs; always helpful in making informed decisions.
I think I got my answer. Nevertheless, here are the details. Bulk of the EMI goes towards interest.
Loan Amount: 28 Lakhs (LIC Hsg Fin)
Tenure: 20 yrs
Commencement: Dec 09
Interest: Locked for 8.9% for 3 yrs (until Nov 12) and market rate thereupon
Current Interest: 8.9%
EMIs paid till date (in months): 24

We will need to use the EMI calculator to see what the payment terms for this loan currently is and how will different payment terms affect this.

This calculator shows that the monthly installment is Rs. 25,000 – and during the term of this loan you pay Rs. 32 lakhs in interest in addition to the original 28 lakhs repayment. So, the whole repayment totals Rs. 60 lakhs over the period of 20 years.

This obviously sounds like a lot at first blush but consider the fact that Rs. 28 lakhs invested at 8.9% for 20 years compounded once a year yield Rs. 1.54 crores!

Now, Sandriano has already paid 24 installments so he has 18 years left, and the NHAI bond had a 8.3% / 15 year option so let me just assume that you will be able to get 8.3% for three more years so we can have a straight comparison.

I downloaded this excel calculator for easy reference and found that on these terms – you would have paid about Rs. 6 lakhs in EMIs for the first two years, but the principal component of that would only be Rs. 1,11,084 and your outstanding principal is still Rs. 26,88,916 (out of the original Rs. 28 lakhs).

So, in a manner of speaking – it’s as if you’re going to take a loan for 18 years at 8.9% today for Rs. 26,88,916 and you suddenly get a windfall of Rs. 1 lakh and you want to see whether it makes more sense to pay off 1 lakh from the principal of this housing loan or would it make more sense to invest this in a tax free bond at 8.3% for 18 years.

If you pay off 1 lakh from the housing loan then your new principal is Rs. 25,88,916 and your new EMI is Rs. 24,082. So, your total cash outflow for 18 years is  Rs.52,01,712 (24,082 x 12 x 18)

If you hadn’t paid off this house loan then your total cash outflow would have been Rs. 54,02,808 (25013 x 12 x 18). So, by paying off Rs. 1 lakh from the house loan, you save yourself Rs. 201,096 in lower EMIs over the course of this loan.

Now, in this case – you invested Rs. 1 lakh in the tax free bonds which earned you an interest of Rs. 1,49,400 (1,00,000 x 8.3% x 18 years) and you got the 1 lakh principal back at the end of the 18 years – so the total money you made in this investment was Rs. 2,49,400, which is Rs. 48,304 more than what you would have saved had you paid off your loan in the beginning of the time period.

So, based on this simple calculation I would say I was wrong earlier as you do get a higher cash-flow  if you invest in the tax free issue instead of paying off the loan.

The one thing I would like to add is that in this comparison is that in case of investing the money – you get a very large chunk – Rs. 1 lakh at the end of 18 years, and even if you assume an inflation rate of 6% for 18 years – that one lakh will only be worth approximately Rs. 35,000.

In contrast – the EMI savings are constant throughout the time period and by virtue of not being lumpy their value might be more in terms of present value despite the absolute number being low.

I know that you can add many more variables to this calculation like tax saved, present value of future cash flows, reinvestment of interest etc. but based on my earlier post in which I compared the tax free bonds to a SBI fixed deposit – I feel that adding so many variables right at the beginning overwhelms many people without having any commensurate benefit.

Finally, given this situation what would you do and what are the other factors that you consider while deciding whether you should pay off debt or make an investment?

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{ 61 comments… read them below or add one }

harinee January 10, 2012 at 8:43 am

Quite an apt post at a time when loan rates are flying high.I was about to declare investments and feel tearful when I look at the rates of my housing loan.I am really looking for an answer on that one too whether to pay a part of it or keep the amount and invest. Tough call!

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Manshu January 10, 2012 at 9:35 am

So your loan is at a much higher rate Harinee? What do your numbers look like right now? I wonder if this type of calculation will show a diff result for your terms.

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harinee January 12, 2012 at 10:21 am

Its 13.5 in a SBI subsidiary(SBBJ). And they claim that while private banks claim lower rates the EMI turns out higher due to hidden charges etc. I have about 29 lakhs loan and paid only 2 years now, so 27 in pricipal needs to be paid.
How does it calculate to,can you advise? Thanks

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Manshu January 12, 2012 at 10:33 pm

13.5% sounds quite high compared to what people have reported here….can you talk to them to see if they can reduce it or is it possible to switch it over to another bank?

Does someone has any idea on this?

Also, what’s the term of the loan – 20 years? In your earlier comment you say 27 in principal needs to be paid but I think there is a mistake in there somewhere….

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Ams January 10, 2012 at 9:49 am

Thanks Manshu. Very appropriate post for me too. I am currently repaying the loan at an interst rate of 10.50 % with total outstanding around 25 lakhs. I too have paid EMI for 2 years now. I too am confused about this to whether it is good to invest or pay off the principle. Personally, I feel paying off would be better as it made more sense to me , but this article has now made me rethink my decision.

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Manshu January 10, 2012 at 8:56 pm

Actually in your case the numbers will probably be in favor of paying off the loan because the rate is higher by 1.6% for 18 years – that will make a difference I think. Plus if you see the above example – the 1 lakh can only be had after 18 years and that’s something to keep in mind.

And also, is it possible for your rate to reset higher?

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Ams January 13, 2012 at 10:00 am

Sorry replying late. Yes, it is possible for the rate to go higher.

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Manshu January 14, 2012 at 9:49 pm

Hmmm, then you’re probably better off paying it now itself because as you see the difference is not much even in the lower interest loan and since it can go up – it probably will go up. I’ll see if I can make a Google spreadsheet that can be used by anyone by entering their numbers and get an answer.

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ANIL KUMAR KAPILA January 10, 2012 at 10:37 am

Hi Manshu
My gut feeling tells me that becoming debt free is the biggest investment one can ever make. There is a saying that it is foolish to take a loan to make an investment. For me it has more to do with my mind than its financial aspect. Personally I will never be able to have a sound sleep as long as burden of debt is hanging over my head. So I will prefer to be debt free as quickly as I can without going in to the economics of the whole thing.

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Manshu January 10, 2012 at 9:07 pm

I’ve made the mistake of not paying off credit card debt and investing that in stocks, and that’s a terrible thing to do but for these kind of debts – like a house loan which is lower in rate and if you can get an investment option that’s closer to what the loan is at – it is probably not that bad.

This is especially so because we need to make some investments while repaying the loan – I don’t see a situation where everything you earn goes off in repaying loans and you aren’t left with anything to invest. Given, that situation – where do you invest? I think these type of options are better for that.

So, what would your opinion be – if you were in these people’s shoes – what would you do?

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ANIL KUMAR KAPILA January 11, 2012 at 7:55 am

Hi Manshu
Perhaps I belong to the earlier generation in which remaining under debt was considered a sin. People were given sermons to learn to live with in their means. Delaying gratification was norm. It was common to see people buying houses only after they had saved enough. Taking loan to meet their day today expenses was unheard of. Only those wealthy people used to take loan who had really no intention of paying it back in their life time.
Now the things have changed. People start dreaming of owning a big car and a big house as soon as they get their first pay cheque.. Some start their plans even before they have started earning. Some have the audacity to even ask their ageing parents to fund their pet projects.
Misuse of loans to pay debt is very rampant . I know many people who routinely get very low interest loans provided by the government to certain category of people like farmers by giving bribes to the officials and then use these loans to fund their investments to create wealth for themselves.
Many people take huge loans but are forced to live from hand to mouth to service those loans. These people have risk appetite but no capacity to take risk . Most of them are not even adequately insured and are subjecting their dependents to huge risk.

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Manshu January 12, 2012 at 2:53 am

I think a permanent shift has taken place in the mentality of people in terms of being more comfortable with debt and be able to live with debt. I think things like a home loan and car loan are not too bad if they are within the means of people.

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ANIL KUMAR KAPILA January 12, 2012 at 7:07 am

Hi Manshu
Personally I feel that after starting earning, during the initial years for around ten years one must concentrate on saving and investing as much as one can comfortably do to meet short and long term goals. To get the benefit of compounding in the long term it is preferable to start investing as soon as possible.
After accumulating a substantial amount one can consider going for a house if one is living at a place where one has to pay very high rent. The amount of loan should be small which can be paid back in a relatively short time.
I think here we are considering mainly those people who are doing jobs for a living. Self employed people with good incomes normally invest in property without taking a home loan.They prefer to take loans to expand their business.
I have recently read in a book on investment that a large number of people in the US keep a substantial portion of their home loans in a contingency fund for meeting their other requirements. It seems that the US laws do not seem to object to this.

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Manshu January 12, 2012 at 8:54 am

In US they have this thing called HELOC or Home Equity Line of Credit. What that means is if you have a house worth 25 lakhs, and you have paid 10 lakhs for that – banks will give you 10 lakhs loan since that is your equity in the house. This is what was used by a lot of people for expenses like vacations etc. and that’s why you saw a lot of mentions of things like people using house as an ATM and all that.

I’ve had a discussion on a few friends who said Indians would never do that because of the mental makeup but I disagree. If this product was introduced, a lot of people will use it in India also.

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ANIL KUMAR KAPILA January 12, 2012 at 11:17 am

Hi Manshu
I agree with you. As far as human behaviour is concerned it remains the same irrespective of in which part of the world you live. That is why the basics of investing remain the same in all parts of the globe. I am sure if this facility is available to us we would be tempted to avail it.
I remember when colour TV was first introduced in India, a lot of my friends wanted to buy even though it was quite expensive. Ultimately we purchased colour TV sets by withdrawing money from our PF accounts.

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Manshu January 12, 2012 at 10:24 pm

Wise words as always! Thanks for your comments – they truly enrich the discussion.

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Indian Thoughts January 10, 2012 at 1:07 pm

For me too. But I am sorry to admit that first time in your (or any post for that matters) I don’t like numbers. I think (at least for me) it is a question more of psychology rather than numbers.
No matter how much I save or build my retirement / investment portfolio at the end of the day I am worried for loan on my head. I am worried for EMI that I have to pay every month. I am worried for my cash flow every month. I need to maintain larger EF just because I have an EMI to pay. And when I moved states, cash flow becomes all the more tougher because now I have an EMI plus rent to pay.

So my solution was to save for retirement moderately (not as an extremist) and first bring my loan amount to such a level where it can service itself. That is if the property is rented out for X amount, its EMI <= X. This way in case of job loss / pay cut, one can always handle their mortgage.

In that case one will have more cash flow, less liability and EF can be kept significantly low.
And that's also one of the goals I have this year.
May be not everybody think like this, but this is how I think.

Plus we, as PF nerds, always talk about compounding of our investment. But let’s consider a scenario and be honest and then estimate what psychological effect it will have on you.

You save 3L for retirement as per your long term plan. If you become aggressive you can save 1L more. Now the question is what to do with this amount.
1) If we prepay the mortgage, we get definite reduction of principal we owed. You can reduce your EMI or not, totally your decision.
2) You chose to invest it and as markets are unreliable, may be that year it took a dip of 24% and your 1L is now only 70-75 K. In long term it will for sure gain back, but did it really had any effect on compounding?

May be this seems completely anti -PF but then no one knows there money better than them.

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Manshu January 10, 2012 at 9:12 pm

This is not completely anti – pf – on the contrary I think it makes perfect sense and for someone for this kind of mental make up is the best thing to do.

I was wondering about one thing that you said viz. “1) If we prepay the mortgage, we get definite reduction of principal we owed. You can reduce your EMI or not, totally your decision.”

I’m not familiar with how home loan repayments works so can you explain this a little bit please? Does this mean that even if your principal is reduced, you can continue paying the same EMI and reduce the duration of the loan? Thanks!

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Indian Thoughts January 11, 2012 at 1:12 pm

Yes that’s very much possible. When you prepay some amount, other then regular EMIs, it directly reduces your principal amount. So you can chose whether you want to reduce your EMI or want to reduce your loan period. In India so far I haven’t seen any provider which doesn’t provide this facility.

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Manshu January 12, 2012 at 2:45 am

Thanks IT – If I had this option I’d always to go for reducing the tenure and end the loan as soon as possible but I guess what you do depends on what other factors of your budget are.

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bemoneyaware January 10, 2012 at 1:45 pm

Found a calculator
Couldn’t do the calculation as was busy with work.

We have a cultural milieu, which equates living without any debts, as a sign of righteous living. You can hold your head high, if you are debt free. Remember HDFC Standard Life’s advertisement pitch ‘sar utha ke jiyo’

Paying-off home loan has to be carefully weighed. It depends on the interest rate being charged, the loan amount, tenure, type of interest rate (fixed or floating), what percentage of salary is the equated monthly instalment (EMI) on the loan etc. Typically, if the home loan EMI is up to 40 per cent of the net income, it is deemed comfortable.
It also depends on other loans that you have such as auto loan or a personal loan or credit card debt pay-off those loans earlier.

For those with variable incomes, like self employed, the risk of a huge loan is pronounced. Such individuals should look at prepaying the loan

Sometimes, due to interest rate movements, the balance tenure may go beyond one’s retirement age. In such situations, prepayment or increasing the EMI, in the earlier days, would be better and the loan tenure will fall within to the working life of the concerned individual.

Not one solution will fit everyone.

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Manshu January 10, 2012 at 9:16 pm

I think if you have other loans then those should be paid first. As far as I know home loans have the lowest rates – just curious if you know otherwise? Are there any type of auto loans that are cheaper than home loans?

Also, are you familiar with any terms of prepayment? My knowledge about this is very little and I am interested in learning about this.

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bemoneyaware January 11, 2012 at 4:08 am

You are right. One needs to pay other loans that have high interest rate esp. if you have credit card loan. Checked bankbazaar for getting an idea about the rate on loans:
Car-loans: 11.00% to 16.25% floating
Personal Loan Interest Rate: 13.75% to 49% fixed
Home Loan Interest Rate: 10.5% to 14.25% floating

Yes at-times you might get auto loan at 0% interest!. This happened sometime back when my friend went for buying a car with the intention of making complete down payment.The dealer convinced him to pay half the amount as down-payment and rest take it at 0% interest :-)

Earlier there were prepayment charges but not now. Due to increase in interest rate last year the home loans were also affected. There were two options : a) Increase the EMI b)Increase the tenure (which at times went beyond the retirement age , then a case for prepayment as mentioned in earlier reply). This can be taken as a topic for a separate post.

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Jitendra P.S.Solanki January 10, 2012 at 2:33 pm

Some points to consider while deciding to pay of or invest the proceeds:

1. Does the repayment of interest and principal helping in saving income tax.Cause once you repay the entire loan your taxability will rise.Hence, if income tax benefit is availed then investing will be more beneficial.

2. The other factor is the effect of rise in EMIs.If it has affected your budget drastically, then repaying will be a wiser option even if the investment is yielding you more.

Everything bowls down to how comfortably you are paying the EMI.If it is stretching your budget then repaying will always be a wiser option.But for someone who is very comfortably meeting this financial burden the comparison with investment is worth to consider.

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Manshu January 10, 2012 at 9:18 pm

In your experience what kind of an EMI is affordable? Would you say a 40% of net income is comfortable like Bemoneyaware said because that seemed very high to me, and I was wondering if it is just me or do others feel like that also?

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Indian Thoughts January 11, 2012 at 1:16 pm

If both the spouses are working and 40% is of one of the spouse, that seems reasonable. If it is 40% of join salary, then its way too high for me too.

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Manshu January 12, 2012 at 2:44 am

Yeah, so that’s more like the 20 – 25% range assuming both spouses earn roughly the same. That sounds a bit more easier to manage to me as well.

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Jitendra P.S.Solanki January 11, 2012 at 9:17 pm

I am of the same view that 40% is way too high.This stretches the liability too far and starts hitting your budget in any scenario.But most take it an ideal ratio and that’s where the most financial problem arise.I personally believe it should not be more than 25% of your net income.That’s when you will not feel it a huge liability as other expenses or investments will be met comfortably.

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Manshu January 12, 2012 at 2:25 am

I think 25% sounds reasonable – a guess why it gets bumped up to 40% is that people have high rents and then they look at an EMI which is somewhat higher than the rent and say to themselves, well I’m paying so much for rent anyway – might as well cough up something more and own the house at the end of it.

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Jitendra P.S.Solanki January 12, 2012 at 8:50 am

Yah rightly said. I think most of the time borrower takes a loan with certain assumptions like income will increase, there will be some source of secondary income going forward etc. and takes a bet by higher EMI payment today.The only feel good factor is that building an asset for the family. And when banks are ready to give a higher amount of loan then why worry?. Very few of us save for building a corpus for higher down payment in order to reduce the EMI amount.The rise in property prices also play a factor as borrower want to go for the investment since he is not sure whether he will be able to make it tomorrow with such high rise in prices.

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anky January 10, 2012 at 2:48 pm

the best option for a young guy under 3o years is to invest that 1,00,000 in 10 blue chip stocks which will yield way more then 8.3% a year after 18 years.

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Manshu January 10, 2012 at 9:18 pm

Only a very small percentage of people will be comfortable in doing that.

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Melvin Joseph January 10, 2012 at 4:57 pm

Most of the home loan borrowers are going to face such situation,when they migrate from the teaser loans to the floating rates. In most cases it will beneficial if you can prepay the home loan compared to investing that amount. If you can manage the higher EMI (without compromising the basis comforts of life) and enjoy the IT benefits in full and if you are good in investing, that option will work. But this option is not easier for many to follow in full spirits.

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Manshu January 10, 2012 at 9:19 pm

Just wondering by how much the percentage changes and effect on EMI – does it jumpy by 3 or 4 percentage points sometimes? Also, what happens in this case – does the bank increase the duration or the EMI amount?

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MoronBuffet January 10, 2012 at 11:42 pm

The eternal travails of a home loan borrower!
It was really funny to see after all the number crunchings, one ends up with 1 lakh after 18 years!

It seems the problem comes with the EMI amount % with respect to net income.
Otherwise, paying off the debt is the best solution.

After (note: after) sanctioning my loan, a manager of the nationalized bank gave his wisdom :

1) Never Go more than 2.5 times your net annual income in overall debt to buy a home.
If loan is for 30 lakhs, your total net income ideally should be 12 lakhs.

2) Buying home for indian customer is always emotional based decision (like he/she bought it, i need to buy, I want a dream home for my children, house is investment, price will only go up etc etc). But banks and media appeal to emotional side only. financially banks gain way more on every loan (like 32lakhs interest on 28lakhs)

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Manshu January 11, 2012 at 2:02 am

Buffett has two Ts.

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bemoneyaware January 11, 2012 at 4:10 am

And 9 zeros after 39 ($39 billion was his net worth) :-)

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Manickkam January 11, 2012 at 11:11 pm

I just did a rough calculation and found that it would make sense to pre-pay the loan if the interest rate is about 4-5% higher than what you can get through investments.

It should be analysed on case to case basis.

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Manshu January 12, 2012 at 2:23 am

That’s interesting – what was the time frame you considered? Does that have a bearing on the answer? Thanks!

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Ashish January 12, 2012 at 5:13 am

In general, ignoring other parameters, any time you take a loan at x% vs. invest the same amount at x-2%, it would be profitable to take the loan and invest the cash; since you pay interest on diminishing principle whereas you gain interest on increasing principle with investment.

What are your thoughts Manush on taking a loan for 15 yrs at 4% vs. 30 yrs at 5% considering you invest the EMI difference?

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Manshu January 12, 2012 at 6:42 am

I don’t think I understand your question….why would I take a loan at 5% when I can get it at 4%?

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Ashish January 12, 2012 at 8:14 am

Well if you take a loan for 15 years you get a lower rate of interest than one for 30 years…

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Manshu January 12, 2012 at 8:47 am

I would prefer a lower rate.

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Vijay January 14, 2012 at 10:24 pm

Consider the post tax savings interest rate and post tax FD interest rate. Put your money where the interest rate is higher. This could be considered now, as the rates have peaked and may stay same before falling.

I just got lucky by locking my home loan with a fixed rate of 8.5 for 3 years from PNB in Oct 2010. I was in a floating rate in Corp Bank(9.5%) and switched to PNB as it provided the best possible saving.

At 30% bracket ,to my point above my post tax (considering only interest component) is 5.95% and with a FD of 9.5% post tax it would be 6.48%. So it would be prudent to use the amount to keep in FD and prepay at latter point of time with a little higher amount.

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Ams nun January 14, 2012 at 10:47 pm

That will be really helpful Manshu

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Manshu January 16, 2012 at 10:10 pm

I gave it a shot – much harder than I originally thought….will probably not be able to do it. Not soon anyway….

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Ams January 17, 2012 at 10:07 am

Thats fine Manshu. Thanks for your efforts.

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Rajkumar January 24, 2012 at 12:51 pm

HI Manshu!!

Now I am in big Dilemma over my planning,I would like to construct a house this is my main intention.presently I am earning 20 k pm. i have deposits upto 6 L.The options for me now is either to take a sbi home loan or to use my current deposits. 10 Lakhs is my house cost estimation.Now the dilemma is whether should I re invest my money in Double you deposit (87 months)scheme in State bank of Hyderabad or should I use it for house construction , and whether to take house loan in SBI of 10 laks @ 11 p.a for 15 year period . and pay back the loan ,pre -payment after my money got double ?so that I can left with 2 laks.

I can pay the EMI upto 12k by making using of rents generating from my new construction.

please advice me

Thanks in advance.
Rajkumar

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Manshu January 24, 2012 at 8:48 pm

Hi Rajkumar,

If the six lakhs is all you have then I think its risky to use it all up to buy a house. What if you need the money for something else – then there’s no where to go.

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Rajkumar January 25, 2012 at 10:35 am

Thank you !!

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Hari February 19, 2012 at 3:55 am

Hi Manshu,

I tend to disagree the numbers you have posted to justify prepaying EMI will result in reduced returns. Naturally paying off 8.9% Loan makes sense when compared to 8.3% Tax free investment(ignoring the Income Tax deduction on Loan Interest).

What I feel is your example has taken into considertion recalculated EMI rather it should have been with recalculated Term. In the same example, if the loan is prepaid with 1,00,000 after 2 years and still the old EMI is carried over, the loan would be prepaid in 222 months as against original 20 years or 240 months. The customer would have repaid a total of 55,40,869 as against original total of 60,03007 which results in a savings of Rs 4,62,137.

Similarly the bond return was shown as a Simple Interest Rate and my assumption is that the Interest is paid out annually and hence annual compounding should have been applied which comes to 4,13,133(for 18 years).

With these 2 numbers, it is evident that user is better in terms of repaying Housing loan. Customer need to check the impact on the Income tax based on their salary to arrive at the impact on the tax angle and should take a decision.

I’m a new visitor to onemint and findingthe articles encouraging and informative. Keep up the goodd work.

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justgrowmymoney February 20, 2012 at 3:58 pm

As a very very rough calculation – for someone who could claim all their interest for tax deduction and is in the 30% bracket the interest rate of 8.9% just falls to 70% of that value ==> 6.2% for the first several years when interest payments make up almost all of the EMI. Even when the principal payments and the interest component are 50 % each the deduction will be 70% of 50% of 8.9% => True cost of loan = 7.56%. Now the principal component raises and slowly the true cost of the loan marches from 7.56% as above towards 8.9%. We see that for a significant/major tenure the ‘true interest’ rate is below 8.3% justifying current investment in a Tax Free bond!!

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Hari February 21, 2012 at 12:49 am

I tried to calculate correctly to get a true picture and I’m sharing the results.

1) In case of self occupied property, the interest considered for tax is upto 1,50,000 and I’m considering this example. For let out property, buying Bonds clearly makes sense.

2) For the example considered above, the benefits of Interest component for tax comes into picture only during the 12th year. Till then, the interest portion is already more than 1,50,000 mark making no difference.

3) The amount saved in tax for those is 10%, 20% & 30% are 21,666 ; 43,333 & 65,000 respectively.

4) Assuming the Income on Bonds for 15 years(tax free) and for the remaining 3 years with tax(in the respective slabs), the Interest earned in the respective slabs would be 4,26,500; 4,15,855 & 4,05,210 respectively.

5) Net savings for the respective slabs would be 4,48,167; 4,59,189 & 4,70,210. On comparing with the savings due to prepayment of loan which is 4,62,137(common for any slab), prepayment yields more for those in 10% & 20% slabs while investing in bonds is more profitable for people in 30% slab.

Decision – I leave it with the individuals.

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P.P.Nadkarni March 26, 2012 at 4:32 pm

Pl add the tax benefit that a person get every year . This will increase the total benefit

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vikash May 9, 2012 at 11:30 am

Hi Manshu,
I had similar query and i wanted to understand the correct utilization of the liquid cash which i have.
I have a home loan(15 years), due of amount Rs 9,55307 for another 109 monthly installment of Rs 13,648. The rate of interest is floating which is at 11.5% in Axis Bank.
I have a cash of Rs 2.8 lac which i thought of repaying the loan amount. But in the mean time i am also planning to buy a car of worth Rs 3.95 lac.

My questions:
1. Is it worth to buy the car by paying cash of Rs 2.8 lac & by taking one lac of car loan at the rate of 11%?
2. Is it worth to prepay my home loan amount by Rs 1.8 lac & use the rest one lac for buying the car & the needed amount(Rs 3 lac) from the car loan for three years.
2.Is it worth to deposit the Rs 1.8 lac in Fixed deposit & use the rest Rs one lac for buying the car

Regards
Vikash

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Manshu May 9, 2012 at 6:47 pm

Interesting conundrum. Let me spend some time on this and see if I can do some comparisons. I should warn you however that this type of thing usually takes me time so I can’t say when I will be able to give you a response.

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Sachin Pradhan June 9, 2012 at 5:24 pm

Sir, I want to take loan of 10 lakhs from lic housing finance ltd for the term of 20 years if i wish to pay it within 10 years i can…do i have to pay the interest for 20 years? please advise and suggest
Sachin

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David from gethomeloans.co.za January 16, 2013 at 1:03 pm

If you are nearing retirement and certain that you have accumulated enough savings to live on, paying off your mortgage can be a sensible choice. For many people, however, investing is a more financially realistic option as this gives some safety buffer against financial emergencies or losses.

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Naresh April 9, 2013 at 4:17 pm

for the new home price is 25 lac and i can earn rent wil be 8000 pm
also the 21 is home loan & emi 30000 approx @11% flat
so in this case what will the approx home price in coming 16 yrs & how much i required to pay

if i save 30 thousand pm in fix interest insted of home purchase @8.5 what will be amount of money after 16 yers
plz sugest that
in what terms i can get benifit
to purchase new home or saving?

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Ajay November 7, 2013 at 12:32 pm

I’d keep the loan – the 30% tax benefit on 1.5 Lakhs that I get every year pushes my decision to keeping the loan. Plus, try and find a better FD that gives your north of 12% interest pa.

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RAJESH AGHAV November 30, 2013 at 7:11 pm

Dear Himanshu Just now left IDBI bank on the month of August as I need Rs.20 lac ros for pay the bulider to take possion I can pay the EMI of RS.25000/ PER MONTH PL ADVISE

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