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Should I take a loan for house construction even if I have funds?

Ramalingam

Ramalingam Kalirajan  |8936 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Feb 07, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
KP Question by KP on Jan 30, 2025Hindi
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I am planning to construct a house and will likely need around ₹75 lakh for the construction. While I have the funds available, I am considering keeping my money in a fixed deposit (FD) and taking a loan of same amount for a tenure of around 10 years. How beneficial would this option be? Kindly suggest if this is a viable approach or if there are better alternatives to maximize financial benefits. Thank you

Ans: Your decision to construct a house is significant. Evaluating whether to use your own funds or take a loan is crucial. The goal is to maximise financial benefits while ensuring liquidity and stability.

Understanding Your Options
Self-Funding the Construction: Using your own money avoids loan interest.
Taking a Loan While Keeping an FD: Fixed deposits provide security, but interest rates matter.
Hybrid Approach: Partially funding the house and taking a smaller loan balances risk.
Analysing Fixed Deposit vs Loan Strategy
FD Returns vs Loan Interest: Loan interest is usually higher than FD rates.
Tax on FD Interest: Returns from FDs are taxable, reducing actual earnings.
Loan Eligibility and Costs: Processing fees and prepayment charges impact costs.
Impact on Cash Flow: Loan EMIs could restrict future financial flexibility.
Pros of Self-Funding
No EMI Burden: No monthly payments improve cash flow.
Lower Overall Cost: Avoiding loan interest saves money.
Greater Financial Freedom: No long-term financial commitments.
Cons of Self-Funding
Reduced Liquidity: A large portion of your capital gets locked in.
Missed Investment Opportunities: Funds could generate better returns elsewhere.
Pros of Taking a Loan
Liquidity Retained: Your funds remain available for emergencies.
Potential Tax Benefits: Home loan interest can provide deductions.
Credit Score Improvement: Timely repayments boost financial standing.
Cons of Taking a Loan
Higher Cost Due to Interest: Paying interest over 10 years increases expenses.
Financial Obligation: Monthly EMIs reduce flexibility.
Fixed Deposit Taxation: FD interest is taxable, lowering net returns.
Better Alternatives to Maximise Benefits
Using a Mix of Own Funds and a Loan: This reduces interest burden while keeping liquidity.
Investing Surplus in Higher-Yield Options: Debt funds or hybrid funds can generate better returns than FDs.
Choosing a Shorter Loan Tenure: Reduces interest costs significantly.
Opting for a Loan with Lower Interest Rate: Comparing lenders ensures cost savings.
Finally
Avoid full loan funding unless liquidity is a concern.
Consider a hybrid approach to balance cost and flexibility.
Choose investments over FDs for better post-tax returns.
Focus on long-term financial stability rather than short-term convenience.
Plan tax-efficiently to optimise deductions and savings.
Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Asked on - Feb 13, 2025 | Answered on Feb 14, 2025
Thank you sir, for the response, i will consider all the points suggested.
Ans: You're most welcome! I'm glad you found the response helpful. If you ever need further guidance or want to refine your strategy, feel free to ask. Wishing you financial security and peace of mind in the years ahead.

Take care and all the best! ????

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8936 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 17, 2024

Asked by Anonymous - May 04, 2024Hindi
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I have taken home loan of 42L in the year 2017 (EMI 33000/Month) for 25Years (300 Months). Due to the continuous increase in the Interest rate, the remaining tenure is keep on increasing and maintaining in 300+ months even after paying the EMI for more than 7 years and Home Loan Principal only 4.5 Lakh is reduced. I am a private company employee of 35 years earning nearly 1Lakh per month and able to save around 15,000 rupees monthly. And with the 15000 monthly savings, i started the following investment/plans from this month 1. I am investing 5000 for Suganya Samriddhi Scheme for my daughter (5years Old). 2. I am contributing 5000 to VPF (My age 35). My existing EPF balance is 5.5Lakh and monthly PF is 4900 deducted. 3. I am making prepayment of 5000 to Home loan principal in addition to monthly EMI. Also i have a Fixed Deposit of 5Lakhs maturing in this year end. I am looking for a expert advise whether the above investment plan is good enough to get benefit in the longer run or any other better safe investment option is available. Please note my year on year annual increment is very less approximately 5000 only.
Ans: Optimizing Your Financial Strategy for Long-Term Benefits
Understanding Your Current Financial Situation
As a 35-year-old private company employee, you're navigating the challenges of a home loan and striving to secure your family's financial future. Despite constraints like rising interest rates and limited annual increments, your prudent savings habits and investment efforts reflect a commitment to financial stability.

Evaluating Your Investment Portfolio
Your current investment strategy, including contributions to the Sukanya Samriddhi Scheme for your daughter, VPF for retirement, and prepayments towards your home loan, demonstrates a balanced approach to wealth accumulation and debt reduction. However, let's assess if there are opportunities for optimization.

Analyzing the Sukanya Samriddhi Scheme
Investing in the Sukanya Samriddhi Scheme for your daughter's future education and marriage expenses is a commendable decision. The scheme offers tax benefits and competitive interest rates, providing a secure investment avenue for her long-term financial needs.

Assessing VPF Contributions for Retirement
Contributing to the Voluntary Provident Fund (VPF) alongside your EPF is a wise move to bolster your retirement savings. Given your limited annual increments, VPF offers a disciplined way to accumulate a substantial corpus for your retirement years, leveraging the power of compounding.

Reviewing Home Loan Prepayments
Making additional prepayments towards your home loan principal accelerates debt reduction and can lead to substantial interest savings over the loan tenure. However, given the low interest rates on home loans compared to potential investment returns, it's essential to strike a balance between debt repayment and wealth creation.

Leveraging Fixed Deposit Maturity
Upon maturity of your Fixed Deposit of 5 lakhs, consider reinvesting the proceeds strategically. Evaluate investment options that offer a balance of safety, liquidity, and growth potential to optimize returns and diversify your portfolio.

Exploring Investment Opportunities
Given your risk appetite and financial goals, explore avenues such as mutual funds, systematic investment plans (SIPs), or diversified equity portfolios for long-term wealth creation. Consult with a Certified Financial Planner (CFP) to devise a customized investment strategy aligned with your objectives and risk tolerance.

Conclusion
Your proactive approach to savings and investments demonstrates a sound financial mindset. By optimizing your investment portfolio, exploring growth-oriented opportunities, and seeking professional guidance, you can enhance your financial well-being and secure a brighter future for yourself and your family.

Best Regards,

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

..Read more

Ramalingam

Ramalingam Kalirajan  |8936 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 04, 2024

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Sir Nameste, Me and my wife from small town working earning 1.13lakh per month, we have 3 loans 1. Icici 10 lakhs @12.39 (2.30 lakhs remaining to closed by september 25) 2. Sbi loan 1.6 lakh just started @ 12.46% 3. LIC loan 2.20 lakh @9% We are government employees both so investment in NPS is aprox 20,000/month We are also investing 19000/month in LIC We had also aquired 2 no. Of land in our locality, (loans are taken for this purpose) Our EMI is aprox 26000/month, and monthly expenses is 53000, we are dipositing all our excess money to our loans so that it all can be closed by 2025 september. Sir what should be my approach to build a house with in next 5 years.
Ans: Assessing Your Current Financial Situation
Your combined monthly income is Rs 1.13 lakh, a solid base for building assets.

You have three active loans with a current EMI of Rs 26,000, which includes loans for land purchase.

Monthly expenses are Rs 53,000, while Rs 19,000 is allocated to LIC premiums, and Rs 20,000 goes to NPS.

You plan to close all loans by September 2025, and currently focus all excess funds towards these debts.

Evaluating Loan Repayment Strategy
Your focus on loan repayment is a wise step. Clearing these high-interest loans will free up monthly cash flow.

Prioritise the SBI loan at 12.46% interest after closing the ICICI loan, as it has a higher rate than the LIC loan.

Once these loans are cleared, your EMI obligation will reduce, allowing you to redirect funds toward home building and investment goals.

Strategic Steps Towards Home Building in 5 Years
Step 1: Plan a Dedicated Savings Fund
Begin a dedicated "Home Building Fund" once the loans are paid off by September 2025. This will give you two years of free cash flow before the home construction goal.

Estimate the cost for building your house. Allocate monthly contributions based on the required budget over 5 years, adjusted for inflation.

A balanced mutual fund or an SIP in a multi-cap fund could be beneficial for growing this fund with moderate risk.

Step 2: Review Existing LIC Policies
Rs 19,000 monthly in LIC may not yield optimal returns. Consider the role of these policies in your overall portfolio.

If these are traditional or endowment policies, they typically offer low returns. Switching to term insurance and investing the rest in mutual funds could enhance your wealth-building potential.

Consult a Certified Financial Planner (CFP) for an analysis of the LIC policies to determine if a shift would benefit your long-term goals.

Step 3: Explore NPS and Additional Investments
NPS is a good retirement tool with Rs 20,000 monthly contribution, but it may not support short-term goals like home building.

Post-loan, consider a diversified mutual fund SIP to grow your funds for the next 5 years, aiming for inflation-adjusted returns.

A combination of large-cap and multi-cap funds offers stability with moderate growth, which is suitable for a 5-year timeline.

Structuring Finances for Future Goals
Step 4: Create an Emergency Fund
As government employees, your jobs are stable, but emergencies can occur. Aim for 3-6 months of expenses saved in a liquid or short-term debt fund.

This fund prevents disruption to your goal-oriented savings if sudden expenses arise.

Step 5: Regular Review and Adjustment
Review your investments annually with a Certified Financial Planner to ensure they align with your timeline and goals.

Assess any rise in construction costs or changes in your financial situation. Regular adjustments ensure you stay on track without compromising other financial priorities.

Finally
Your disciplined approach to clearing loans and managing monthly contributions is commendable. A focused investment strategy after loan repayment will allow you to grow the funds needed to build your house in 5 years. Maintain an emergency fund, optimise insurance, and regularly review your investments to ensure a steady path toward your home-building goal.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

..Read more

Ramalingam

Ramalingam Kalirajan  |8936 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 15, 2025

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Hello, I am Dr D, an Nri, since 9 years. I am building a house back in India, the total cost of project including land and construction is 2.4 Cr. As of now, i have fd of 1 cr, and investments in stocks since 2013 of 1.1 Cr, which have grown to 2.3 Cr. I have paid 50 % of the construction cost and need another 1.2 Cr over next one year which i have to pay in installments as the project completes. plus another 25 lakh for the interior and paper works. i have monthly income of 7.5 lakh ( after conversion to INR) of which i can save 4 lakh per month. i dont have any other liabilities. i dont have any loans to repay as of now. 1. How do i fund the construction cost? Should i take a loan or break my FD? Please suggest. If need further details please let me know.
Ans: You are in a very strong financial position.

Your monthly income of Rs. 7.5 lakh is stable and high.

You are able to save Rs. 4 lakh monthly. This shows excellent discipline.

Your stock investments have grown well from Rs. 1.1 crore to Rs. 2.3 crore.

You also hold Rs. 1 crore in fixed deposits. This gives you good liquidity.

You have already paid 50% of your home construction cost. This shows planning.

You need Rs. 1.2 crore more for construction, plus Rs. 25 lakh for interiors.

You have no loans or other liabilities. That gives you complete flexibility.

Let us now plan a simple way to manage the remaining Rs. 1.45 crore requirement.

Goal: Complete Home Construction Without Compromising Wealth Creation

You should aim to fund the house, and also retain equity growth potential.

Home is a consumption asset, not a financial one.

You already have 50% sunk cost in it. Balance 50% must be handled carefully.

You should avoid full withdrawal of your investments.

You should avoid breaking your FD fully in one go.

Also, avoid selling all your stocks together. That could trigger capital gains tax.

Try to split the funding over time. Use both assets and cashflow efficiently.

Recommended Funding Plan for Rs. 1.45 Crore Requirement

You can manage the funding with a mix of strategies.

You save Rs. 4 lakh monthly. That gives you Rs. 48 lakh over next 12 months.

Use this full Rs. 48 lakh for construction in monthly instalments.

That brings down the funding gap from Rs. 1.45 crore to about Rs. 97 lakh.

You can break FD partially to support balance amount in tranches.

Avoid breaking full Rs. 1 crore. Just break Rs. 50–60 lakh over 12 months.

Plan the FD maturity in 3 or 4 parts. Link them to construction payment schedule.

FD withdrawal is tax efficient as there is no capital gain tax involved.

Use your stock portfolio only if the market is favourable.

Sell part of equity, say Rs. 30–40 lakh in 3 tranches, only if markets are high.

Pick low conviction stocks or overvalued ones to sell.

Avoid panic selling or large lump sum withdrawals from equity.

Keep Rs. 40–50 lakh equity intact for long term growth.

About Loan Option: Take Only If Really Necessary

You don’t need a home loan in your case. But still, keep this backup.

Bank loan will cost you 8.5% to 9.5% interest.

That’s higher than FD interest and equity growth.

You are already able to save Rs. 4 lakh monthly.

Your liquidity is strong. So loan is not ideal in your case.

But still, have a pre-approved loan facility as backup.

If markets fall or FD is illiquid, loan gives flexibility.

You can take overdraft-type loan. You pay interest only on used amount.

Don’t take fixed EMI loans unless you have no other option.

Don’t use loan for interiors. Use only savings and FD for that.

Managing Your FD Efficiently During This Time

Let your FD serve construction flow with minimum tax impact.

Break the FD into 3 to 5 smaller deposits.

Let each part mature every 2–3 months.

This ensures your funds are not idle.

You avoid breaking entire FD at once.

Choose the highest interest paying FD. Prefer reputed banks.

Avoid corporate FDs unless AAA rated. Safety matters more now.

Keep Rs. 10–15 lakh FD as reserve. Don’t use up all.

Using Equity Smartly Without Disturbing Long Term Goals

Your stocks have grown well. But do not overuse them now.

Selectively redeem high valuation stocks first.

Don’t redeem high growth or dividend paying stocks now.

You can redeem stocks where conviction is now weak.

Avoid emotional attachment with any particular stock.

Ensure equity selling is spread across 2–3 quarters.

That way you can also manage capital gains taxation.

New rule allows Rs. 1.25 lakh LTCG tax free each year.

Beyond that, tax is 12.5% on long term equity capital gains.

Short term capital gains are taxed at 20%. So avoid recent stocks for redemption.

Interior Costs and Paper Work – Manage with Savings and FDs

Your interior and paperwork cost is Rs. 25 lakh. Handle it easily.

This is 5 to 6 months of your regular savings.

You can plan this expense over 6 to 8 months.

If some urgent payments arise, use FD tranches for it.

Don’t use equity investments for this portion.

Interior should not compromise your long-term wealth.

Future Strategy: Rebuild Portfolio Once House is Completed

Once your house project is complete, rebuild your portfolio slowly.

You can restart monthly equity SIP of Rs. 2 lakh from 2026 onwards.

Pick actively managed mutual funds through Certified Financial Planner.

Avoid direct funds. They offer no guidance or rebalancing support.

Avoid index funds. They give average returns, no downside protection.

Let your planner design an asset allocation plan.

Include equity, debt mutual funds, global funds, and gold savings.

Target Rs. 5–6 crore financial assets in next 10 years.

Don’t mix real estate again. You already own a big house now.

Review portfolio every year. Do rebalancing with expert help.

Your Risk Protection and Emergency Readiness

You must protect your family now with right insurance and emergency funds.

Have a term insurance of at least Rs. 1.5 crore.

Ensure Rs. 10 lakh health cover for you and family.

Keep Rs. 10 lakh as emergency fund in savings and liquid fund.

This ensures home funding plan does not get disturbed.

Finally

You have handled your finances wisely over the years.

You are in a better place than most people of your age.

Now your goal is to complete home peacefully without disturbing wealth.

Use your monthly savings, FDs and equity carefully.

Don’t rush to sell everything or take unnecessary loan.

Once house is done, build financial assets faster again.

Take help of a Certified Financial Planner to guide your investments.

Avoid random advice or trial-and-error approach in wealth building.

This is the right time to bring clarity and long-term planning.

Keep financial documents, home papers and investments organised.

Make a written plan for next 5 years with milestones.

Stick to the plan with discipline. Make adjustments only when required.

You have the right income, assets and mindset.

Now convert that into lasting financial security.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

..Read more

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