Pay off housing loan vs investing question (equating tax benefits) - Posting here as didn't get many answers in the Discord server

[resjudicata]

@rezene

1.5 lakh on principal

Ignore this, since you're most probably hitting 1.5 Lakh with your EPF + life insurance premium itself. Just consider the 2 lakh interest amount.

If you are paying more than 2 lakh interest, and you prepay the loan, you'd pay roughly 60K more tax (assuming you're in the 30% slab) once the loan is done. So you need to find an investment avenue that can give you returns of more than 60,000pa on investment of approx 4.5 Lakh (37000 x 12) - roughly 15% pretax if I'm not wrong.

Oh, and to just add a twist to the calculations, try and incorporate inflation. ₹37000 today is worth more than ₹37000 5-6 years from now.

 

[rezene]

@resjudicata You are right. Getting 15% pretax is a tough, maybe an impossible, nut. Even with equities I don't go beyond the modest 9-10% pre-tax.

So do you suggest maintaining the loan without any adjustments?

 

[drummerkid]

@rezene Always prepay. You never know your situation in next few years. It's best to get rid of debt as soon as possible

 

[pharbach]

@rezene What would be your liquidity situation if you pre-pay your loan? If not wait till you reach a point where your think you are enough liquid post payemt for emergancy situation.

 

[rezene]

@pharbach Exigency fund is filled to the brim for 12 months, which is why I began researching on this. This is my only liability at the moment and it's a property I currently live in.

 

[tnichols2012]

@rezene I am in a similar scenario. I am in a position to pre pay the home loan. I have sbi max gain account which is an OD account. I am thinking to put the entire principal in the OD account. That way there won't be any interest and the loan is as good as closed. Added advantage is that I have a low cost credit line open which I can use in case of emergency. I know this can be a disadvantage for those who are not that disciplined.

Any other issue with above approach vs closing the loan account?

 

[creation777]

@tnichols2012 If flexi loan account is not closed though technically zeroed out, just check with your banker what happens to your emi/ecs instructions ?

 

[tnichols2012]

@creation777 Emi will continue to be deducted. Only the principal part. No interest.