P V Subramanyam takes a hard look at the pros and cons for both options.
Five years ago, you took a Rs 4,0,=00,000 (four million) housing loan.
Today, you are comfortable with the Rs 40,000 per month EMI that you are paying.
Your spouse and you -- if you are married -- find that you can easily increase the EMI to Rs 50,000 without a sweat.
Should you increase the EMI and repay the loan faster or should you do invest in a mutual fund via a SIP for Rs 10,000?
Let's look at the pros and cons so that you can decide what works best for you.
Repaying the loan
1. Most of the Indian middle class considers a loan a burden and prefers to repay quickly.
If this is how you feel, you will obviously repay the loan.
Before you do that, though, consider this: 'Is the Rs 10,000 giving you a better yield in the investment or are you better off repaying the debt, thus increasing your net worth?'
2. If your CTC is Rs 2,000,000 and your spouse is earning say Rs 1,000,000 (it could also be vice versa), the outstanding loan amount is very small. It is just 15 months' income.
Do not let the absolute amount worry you. See how many years of income it translates to; upto five years is fine.
3. If you are planning to buy a bigger house in, say, five years, do not repay the loan and take a big loan again.
Instead, keep part of your original loan pending and go to the same lender.
You can expect a waiver of processing fees and get such concessions on your new loan.
4. The value of your house will appreciate/ depreciate -- the repayment has nothing to do with that process.
5. You will save on interest expenses, no doubt about that.
However if your loan is at about 10 per cent, remember inflation is also at about 9 per cent. So interest rates in India are at historical lows.
6. You may sleep easier after paying off your loan; that is an emotional call you and your spouse have to take.
What happens if you invest for retirement?
1. Say you put this money in an ELSS fund; it means you are building an all equity portfolio for the next 15 years.
This is a nice time frame within which to build a good equity portfolio.
Equities, historically, over a 15 year term, should give you about 2 to 3 per cent real returns (actual percentage returns minus the rate of inflation).
2. The power of compounding over the next 15 years -- even with just a small 1 to 2 per cent difference -- can work out to a nice return.
3. From the tax point of view, both are the same.
The interest payment as a tax deduction is a lousy reason to keep the loan irrespective of what your CA tells you.
What would I have done?
I would invest in ELSS if I needed a tax break or invest in a nicely managed equity fund.
P V Subramanyam is a chartered accountant with more than four decades of experience in the field of personal finance and blogs at subramoney.com.
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