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

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: Hi Shaks,

Your query will resonate with many working professionals.

First and foremost, please check/calculate if you have capital gains arising out of the sale of your current flat. This is important for tax implication and will also help make your decision for utilizing the funds.

Lets assume you have some capital gains from this sale, then you can again have to confirm if the capital gains can be utilized without paying tax on it - this is possible if you have purchased the new flat within the last 1 year. If so, then you can utilize/adjust the capital gains towards payments made for the new flat and save tax on it. If you have purchased the new flat earlier than the last 1 year, then you have 2 options - pay tax on the capital gains and then use the funds as you wish OR invest the capital gains amount in NHAI bonds (locked) for the next 5 years (pay tax only on the interest earned).

Once you have sorted the above, you will know what is the amount in hand to make your decision, so lets dive into it.
You have a loan of 60 Lacs and you can manage the EMI from your salaries. Over the next 6-7 years, your salary will also see an increment of approx 7-8% annually, so I suggest you utilize this excess amount each year to prepay/topup your EMI payments. This will help reduce the loan burden over time. At the time of retirement, your loan outstanding can be paid with available options at that time.
You mentioned PPF as an option - I would suggest you do not utilize PPF amount towards this loan closure. The reason is PPF is a completely tax exempt asset and can be utilized well towards retirement income. Of course depends on how much you have accumulated in PPF.

So lets now consider paying the loan amount with the sale proceeds of the current flat. You have a loan today (assuming interest rate applicable is 8-8.5%), which you can manage and you are keen to continue it till retirement, so also recommend you do so. Keep the sale proceed amount available for investment and wealth creation as there are opportunities that can generate returns at a same rate (conservative options) and higher returns (with a slightly higher risk associated).

As you do not have any major liability which is outstanding or cannot be managed, and also you are investing 90k per month in Mutual funds, you can consider wealth creation options for the sale amount available.
PMS is an option but I feel its risks will out weigh the returns in the time frame you have, unless you have a known and trust-worthy option you want to consider.
As you are looking to retire early, at age 50, you should target to create a corpus that will sustain your retirement life (consider at least 30 years post retirement) and your child's education requirements.
Hence my recommendation would be to invest in Mutual Funds and continue with your PPF until retirement. A well constructed portfolio to create a retirement corpus and your child's education requirements would be required.

You can consult a Certified Financial Planner to help you with this plan. They can guide you with your Investments and Retirement planning and provide options to consider and provide advise on risk management (Insurance requirements).

Thanks & Regards
Janak Patel
Certified Financial Planner.

Ans: Hello;

From financial prudence stand point as well as tax point of view it makes sense to repay the home loan.

Capital gain from the sell of old property can be set off against new property loan repayment thereby avoiding capital gain tax payment completely.

However considering new Incom tax bill recently passed by the parliament it would be better to consult a CA specializing in personal income tax, on this topic.

You may keep the tenure same and reduce EMI thereby getting more investible surplus income that could be moved to NPS/monthly sip's towards your long term goals.

Best wishes;

Ans: You are 35 years old, earning Rs. 2 lakhs monthly.
You have an outstanding home loan of Rs. 75 lakhs at 7.9% interest, with an EMI of Rs. 1 lakh.
You invest Rs. 15,000 monthly in the stock market.
You contribute Rs. 10,000 monthly to the Sukanya Samriddhi Yojana (SSY) for your daughter.
You allocate Rs. 20,000 monthly for family needs, emergency funds, and annual expenses.

Your disciplined approach to financial planning is commendable. Let's analyze your situation and explore the best strategies for home loan repayment and investment management.

1. Home Loan Repayment Strategy

Prepaying your home loan can reduce the total interest paid over time.

With a 7.9% interest rate, early repayment can lead to significant savings.

Consider making partial prepayments annually to reduce the principal amount.

This strategy can shorten the loan tenure and decrease the interest burden.

Ensure that prepayment doesn't attract penalties; check with your bank.

Some banks waive prepayment charges for floating-rate loans.

Maintain a balance between loan repayment and liquidity needs.

2. Investment vs. Loan Repayment

Investing in equity markets can potentially yield higher returns than the loan interest rate.

Historically, equity investments have offered returns between 10-12% annually.

However, market investments carry risks and are subject to volatility.

Prepaying the loan offers a guaranteed return equivalent to the interest rate saved.

Evaluate your risk tolerance before deciding between investment and loan repayment.

A hybrid approach can be beneficial: allocate funds to both investments and loan prepayment.

3. Emergency Fund Management

Allocating Rs. 20,000 monthly for emergency funds and annual expenses is prudent.

Aim to build an emergency corpus covering at least 6-12 months of expenses.

This fund provides a safety net against unforeseen financial challenges.

Ensure that this fund is easily accessible and stored in liquid instruments.

4. Sukanya Samriddhi Yojana (SSY) Contributions

Investing Rs. 10,000 monthly in SSY is a wise choice for your daughter's future.

SSY offers attractive interest rates and tax benefits under Section 80C.

Continue these contributions to secure funds for her education and marriage.

5. Stock Market Investments

Investing Rs. 15,000 monthly in the stock market can aid wealth accumulation.

Diversify your portfolio across sectors to mitigate risks.

Regularly review and adjust your investment strategy based on market conditions.

Consider consulting a Certified Financial Planner for personalized investment advice.

6. Tax Implications

Home loan interest payments qualify for tax deductions under Section 24(b).

Principal repayments are eligible under Section 80C.

Prepaying the loan may reduce these tax benefits.

Evaluate the net tax impact before making a decision.

Consult a tax professional for personalized advice.

7. Final Insights

Maintain your emergency fund to ensure financial security.

Consider partial prepayments to reduce the loan tenure and interest burden.

Balance your investments and loan repayments based on your risk appetite.

Continue SSY contributions for your daughter's future needs.

Regularly review your financial plan with a Certified Financial Planner.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment