Should I Close Home Loan and Invest 280 Lacs? | Expert Advice

Ans: Considering your situation, it's great that you're contemplating your financial future. With your stable income, you have the potential to make wise choices.

Your housing loan's interest rate is relatively low, which is beneficial. By maintaining regular EMIs, you're already on track to clear the loan within the stipulated tenure.

Investing in mutual funds is a solid strategy, offering potential returns higher than your loan's interest rate. It allows your money to grow over time.

However, investing additional funds to close your loan faster can bring peace of mind. It reduces your debt burden and saves on interest payments in the long run.

Before deciding, consider your risk tolerance and financial goals. Ensure you have an emergency fund and are contributing to retirement savings.

As a Certified Financial Planner, I recommend diversifying your investments. Explore different asset classes to mitigate risk and maximize returns.

Regular mutual funds through a certified financial planner can offer personalized guidance, potentially outperforming direct funds in the long term.

Remember, financial planning is about finding the right balance between debt management and wealth accumulation.

Take your time to weigh the options and choose what aligns best with your aspirations and comfort level.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

Ans: Here's a simplified analysis to help you decide:

Prepayment vs. Investment: Prepaying your loan saves interest but reduces available investment capital. Investing offers potential growth but your loan continues to accrue interest.

Consider Interest Rate: At 6% interest, your loan rate is relatively low. Aggressive prepayment might not be as beneficial.

Option 1: Invest (Potential Higher Returns):

Invest 4 lakhs annually in equity mutual funds (SIP) for potentially higher returns over the long term (10+ years).

Continue paying EMIs. Consider increasing SIP amount if your income grows.

Option 2: Prepay Loan (Guaranteed Savings):

Prepay 4 lakhs annually to reduce your loan tenure and total interest payout.

Invest remaining amount after considering emergency fund needs.

Talk to a Financial Advisor:

A financial advisor can consider your risk tolerance, investment goals, and future income projections to create a personalized plan for you.

Ans: Assessing Your Current Financial Situation
Your combined income is Rs 2.4 lakhs per month. Your expenses are Rs 2.7 lakhs, including a Rs 70,000 home loan EMI. You’re also investing Rs 70,000 per month. This shows strong financial discipline, but the gap between income and expenses is concerning.

Evaluating the Home Loan Repayment
You have Rs 13 lakhs outstanding on your home loan with 23 installments left. Paying off this loan early has both pros and cons.

Benefits of Repaying the Loan Early:

Interest Savings: You save on the interest you would have paid over the remaining installments.

Debt-Free Living: Being debt-free can reduce financial stress. It also frees up Rs 70,000 per month.

Drawbacks of Early Repayment:

Opportunity Cost: You might miss out on potential higher returns if you invested this amount.

Liquidity Impact: Using Rs 13 lakhs to close the loan reduces your liquid savings.

Considering the SWP (Systematic Withdrawal Plan)
Investing Rs 13 lakhs in a SWP can provide regular income and potential capital appreciation. However, it’s essential to understand the pros and cons.

Benefits of SWP:

Regular Income: You get a steady income stream, which can supplement your monthly cash flow.

Capital Growth: Your investment has the potential to grow, giving you more value in the long term.

Drawbacks of SWP:

Market Risk: The returns depend on market performance, which can fluctuate.

Not Debt-Free: You’ll continue paying the home loan EMI, which could strain your cash flow if the market underperforms.

Cash Flow and Expense Management
Your current expenses exceed your income by Rs 30,000. This is manageable now, but it’s not sustainable in the long run.

Prioritize Debt Repayment: Paying off the home loan can reduce your monthly outgoings by Rs 70,000, giving you breathing room.

Emergency Fund: Ensure you have an emergency fund that covers at least six months of expenses.

Deciding Between Loan Repayment and SWP
Your decision should align with your financial goals and risk tolerance.

If You Prioritize Security:

Repay the Home Loan: This eliminates a significant monthly expense and provides peace of mind. It also improves your monthly cash flow by Rs 70,000, which you can then redirect towards savings or investments.
If You Prioritize Potential Growth:

Invest in SWP: This can provide regular income and the possibility of higher returns. However, be prepared for market fluctuations and ensure you have a backup plan if the returns are lower than expected.
Final Insights
Given your current situation, repaying the home loan could be a safer option. It will reduce your monthly expenses, eliminate debt, and provide more flexibility in your finances. If you prefer taking calculated risks, consider the SWP option but ensure you have a solid plan to manage your cash flow.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Dear Friend, Given your current financial standing, closing your home loan by March 2025 seems like a wise choice. You have Rs 26.5L parked in the SBI Max Gain account, which already reduces your interest liability. By clearing the remaining Rs 12.65L, you can become debt-free, providing peace of mind and freeing up your EMI payments for additional investments. While the home loan offers tax benefits under the old regime, the psychological comfort of being debt-free may outweigh the potential tax savings, especially since your financial portfolio is already strong.
Once the loan is closed, increasing your monthly SIPs to Rs 2L would be a smart move. Over the next 10 years, equity mutual funds, which historically offer returns of 10-12% annually, can significantly grow your wealth. Since you are already investing in a diversified portfolio of index, small-cap, mid-cap, and flexi-cap funds, increasing these investments aligns well with your long-term goals.
Investing in real estate, particularly land, can provide diversification. However, real estate is typically less liquid and the returns can be location-dependent. If you're confident in the property’s growth potential, this can be a good long-term investment. However, your existing strategy of focusing on equity mutual funds will likely offer better returns and flexibility, given your 10-year investment horizon.
So closing your home loan by March 2025 and redirecting the freed-up funds into increased SIPs appears to be the best route. It balances peace of mind, tax efficiency, and long-term wealth creation, while real estate can be considered for diversification if you find a promising opportunity.
There are many real estate opportunities like REIT or Partial ownership in commercial properties which can also yield between 14 to 22% overall return with about 5 to 8% monthly return and 10 to 12% of Growth in the Asset Value at end of tenure.
Investment is commodities like gold and silver can also yield a return of 8 to 10% with reducing the risk in one sector.
Diversification is the mantra, do not depend on only one or two type of investment avenues. Explore other options as well.

Best regards,
Nitin Narkhede
Founder & MD, Prosperity Lifestyle Hub https://Nitinnarkhede.com
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