ATM :: If home loan rate is lower than earnings rate, continue loan


Surya Bhatia: First Published: Thu, Mar 14 2013. 07 05 PM IST; Live Mint website

ATM

I am 34 years old and my net monthly salary is around Rs.90,000. I invest Rs.1 lakh in mutual funds (MFs) annually, including both debt and equity schemes. I also have Rs.10 lakh in my Employees’ Provident Fund (EPF) account. I have an insurance cover of Rs.4 lakh for myself and Rs.15 lakh for my family. I am also paying an equated monthly instalment (EMI) of Rs.20,000 towards my home loan. I am thinking of prepaying a part of my home loan by taking money from my EPF account. I want to invest the extra money every month that I will have after the reduced EMI amount in a systematic investment plan (SIP) of an equity MF scheme. Do you think it is advisable?
—Anand Krishnan

There are a few factors that you should consider before prepaying the housing loan. Prima facie your loan appears to be less than Rs.25 lakh and in that case you will have a preferential rate of interest and if otherwise, check the interest rate to see if you can get a better rate. And it is expected that the interest rates will come down in the coming quarters.

Further, is the loan taken for a self-occupied property or a leased out property or for a property that is under construction? In the first two instances, you are eligible to claim the interest benefit under the Income-tax Act, while in the last option, you can claim the interest benefit only after the possession of the property. And till the interest rate (net of tax advantage) is equal or lower than your earning rate from your other investments, you should continue with the loan. And yes, you also need to keep a watch on the liquidity.

Chances of debt investments or EPF yielding you a higher return or even matching the interest rates on housing loan (if it is not tax efficient) is low and if true, you should consider prepayment of the loan. At the same time, your insurance cover is inadequate and it does not even cover the housing loan, leave aside further protection for your family. So even if you prepay the loan, you need to enhance your life cover; consider a term plan. At the same time, consider buying a health insurance for yourself and your family, even if your employer provides one.

The extra funds can rightly be invested in an equity MF. Subject to your existing investment, you can consider multi-cap funds, where Templeton India Growth and ICICI Prudential Dynamic Fund are good. However, ensure any investment done in the equity asset class is meant for the long term and five years should be considered the minimum horizon. As mentioned above, you can stop your debt investments as that portion should be used to prepay the loan and instead consider hybrid and balanced funds such as HDFC Balanced, which will also provide stability to the portfolio. Only if you are using the debt portfolio for liquidity or short-term needs, they should be continued.

Source : http://goo.gl/f4FoI

Please NOTE:

In addition to the above recommendations, if you are able to transfer your housing loan to an overdraft product like Home Saver (SCB) or Max Gain (SBI) you will benefit immensely in the long run. Making it your salary account is even better (but make sure you understand how to use the account). You will SAVE or EARN at the rate of housing loan interest rate!!

Disclaimer
* INtegra FinServe does not guarantee assured returns on any investments recommended by it. All investments are subject to market risks and are made at the sole discretion of the investor. Our advice is not meant to be a substitute for other inquiry or investigation or caution that one should undertake or exercise in connection with any decision relating to investments or financial plan. To the fullest extent permitted by law, INtegra FinServe owes no duty to the recipient of advice, whether in contract or in tort or under any statute or otherwise (including in gross negligence) and will not be liable for any direct/indirect damages or losses suffered or costs incurred by the recipient with respect to or in connection with the advisory services.

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