I have outstanding home loan of 24 lakhs( Interest rate-8.55%) I have a ULIP plan with current valuation as Rs. 13 lakhs (IRR- 17%) and maturing in 2027. Should I redeem my ULIP for pre payment towards my home loan.

Ans: You have an outstanding home loan of Rs. 24 lakhs with an interest rate of 8.55%. You also have a ULIP plan with a current valuation of Rs. 13 lakhs and an IRR of 17%, maturing in 2027. Deciding whether to redeem your ULIP to prepay your home loan requires careful evaluation.

Understanding Your Current Financial Situation
Home Loan:

Outstanding Amount: Rs. 24 lakhs
Interest Rate: 8.55%
Monthly EMI: Calculated based on the loan amount and tenure
ULIP:

Current Valuation: Rs. 13 lakhs
IRR: 17%
Maturity Year: 2027
Assessing the Home Loan Prepayment
Advantages:

Interest Savings: Prepaying your home loan reduces the total interest outgo over the loan tenure.

Emotional Relief: Owning your home outright provides emotional and financial peace of mind.

Disadvantages:

Liquidity Reduction: Using a lump sum to prepay your loan reduces your liquid assets.

Missed Investment Returns: You might miss out on potential higher returns from your investments.

Evaluating the ULIP Plan
Advantages:

High IRR: Your ULIP has a strong IRR of 17%, indicating good performance.

Maturity Benefit: ULIP maturity benefits can be substantial if left to grow until the end of the term.

Disadvantages:

Market Risks: ULIP returns are market-linked and can fluctuate.

Lock-in Period: ULIPs have a lock-in period, and premature withdrawal might attract charges.

Comparative Analysis
Interest Savings vs. Investment Returns
Home Loan Interest Rate: 8.55%

ULIP IRR: 17%

Evaluation:

Higher Returns: Your ULIP’s IRR of 17% is significantly higher than your home loan interest rate of 8.55%.

Opportunity Cost: Redeeming the ULIP to prepay the loan means losing out on higher potential returns.

Financial Goals and Liquidity
Emergency Fund: Ensure you have an adequate emergency fund before making large financial decisions.

Long-Term Goals: Consider your long-term financial goals and how prepaying the loan or investing aligns with them.

Evaluation:

Emergency Fund: Ensure sufficient liquidity for emergencies and unforeseen expenses.

Long-Term Wealth Creation: Higher investment returns can contribute significantly to long-term wealth accumulation.

Recommendations
Continue with ULIP
Higher Returns: Given the higher IRR of your ULIP, it is beneficial to let it mature.

Diversification: Maintaining investments in different instruments ensures balanced risk and returns.

Partial Prepayment
Balanced Approach: Consider using a part of your savings or other investments for partial prepayment.

Interest Savings: Partial prepayment can still reduce your overall interest outgo without compromising future returns.

Increase EMI Payments
Accelerate Loan Repayment: Increasing your monthly EMI can help repay your loan faster, saving on interest.

Manageable Impact: This approach maintains your ULIP investment while reducing loan tenure.

Implementing the Strategy
Review Financial Health
Assess Liquidity: Ensure you have sufficient liquid assets for emergencies.

Evaluate Risk Tolerance: Understand your risk tolerance before making financial decisions.

Long-Term Planning
Financial Goals: Align your decisions with your long-term financial goals.

Diversified Portfolio: Ensure a balanced and diversified investment portfolio.

Monitor Performance
Regular Review: Periodically review your ULIP performance and loan status.

Adjust Strategy: Be flexible to adjust your financial strategy based on market conditions and personal circumstances.

Conclusion
Balancing loan repayment with investment growth is crucial for long-term financial health. Given your ULIP’s high IRR, continuing the investment till maturity is recommended. Partial prepayment or increasing EMI payments can help balance interest savings with investment growth. Always ensure you have adequate liquidity for emergencies and align decisions with your long-term financial goals. Your proactive approach to managing finances is commendable.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in