Dear Gurus, I have a SBI max gain Home loan (17Lakh) overdraft facility with monthly emi of 20000, but I have parked the entire amount in the HL balance and not being charged any interest, so the auto EMI deducted from SBI savings account, I manually transfer it back to my savings account every month....is that OK to do? considering I may have to buy any new property in future & during that time I can used this parked money OR should I close the Home loan & stop the auto EMI?

Ans: SBI charges interest on a daily reducing basis so that if you are paying a higher amount than the EMI then you will get credit for it accordingly. Your home loan would get over by 9 years if you pay EMI of 30K. This assumes that the details given by you are correct and that interest rate charged by SBI is 8.25 per cent which appears to be very low.

Ans: No FD can possibly give you an interest rate that will exceed the interest rate you are paying on the home loan. Liquidate the FD and payoff the home loan immediately.

Ans: Considering that interest rates are low currently, that you are getting a tax benefit and that the MaxGain account allows you to net off your account balance, it is a good idea to continue the loan.

You can choose to maintain the balance in the account and, if your balance is to the extent of your principal, you will not pay any interest in the worst case scenario.

You can calculate the net cost to you after the tax saving. For example, if your interest rate is 7 per cent and you are in the 30 per cent bracket, your net cost is 4.9 per cent. If you are able to invest and get a return higher than 4.9 per cent, then it is beneficial to invest.

You can calculate the net cost to you on similar lines, based on the tax bracket and the surcharge levels.

You could look to start a SIP in mutual funds or make any other investment from this account if your return is higher than the net cost. This will make your money work for you.

While investing money from the account, keep in mind that it is not a good idea to invest in FDs or other debt options if your post tax return is lower than 4.9 per cent. Worse still is to park your money in a savings bank account.

Ans: You are 39 years old with a monthly income of Rs. 2.25 lakhs.
You have a home loan of Rs. 14 lakhs outstanding with an EMI of Rs. 37,500.
The loan tenure remaining is 4 years.
You have mutual fund investments worth Rs. 24 lakhs.
You hold gold bonds worth Rs. 3 lakhs.
You maintain a short-term fixed deposit of Rs. 12 lakhs as an emergency fund, covering 12 months of expenses.

Your financial discipline and foresight are commendable. Let's analyze your situation and explore the best course of action.

1. Home Loan Prepayment Considerations

Prepaying your home loan can reduce your interest burden.

With 4 years left, interest savings may be moderate.

Prepayment can provide psychological relief from debt.

It can also improve your credit score.

However, consider if prepayment charges apply.

Some banks may levy penalties for early closure.

Ensure you have sufficient liquidity post-prepayment.

Avoid dipping into your emergency fund for prepayment.

Evaluate if the interest saved outweighs potential investment returns.

2. Mutual Fund Investment Perspective

Your mutual fund corpus is substantial at Rs. 24 lakhs.

Equity mutual funds have historically offered 9-12% annual returns.

Staying invested can potentially yield higher returns than loan interest saved.

Mutual funds offer liquidity and flexibility.

They can be aligned with long-term financial goals.

Consider the tax implications of redeeming mutual funds.

Long-term capital gains above Rs. 1.25 lakh are taxed at 12.5%.

Short-term gains are taxed at 20%.

Evaluate if the net returns justify staying invested.

3. Emergency Fund Adequacy

Your emergency fund covers 12 months of expenses.

This is a robust safety net.

Ensure the fixed deposit is easily accessible.

Avoid using this fund for loan prepayment or investments.

Maintain this buffer for unforeseen circumstances.

4. Adjusting EMI and Redirecting Funds

Reducing EMI to Rs. 20,000 can free up Rs. 17,500 monthly.

Redirecting this amount to equity investments can build wealth.

Ensure that the extended loan tenure doesn't increase total interest significantly.

Consider the opportunity cost of lower EMI versus higher investment returns.

Align this strategy with your risk tolerance and financial goals.

5. Tax Implications and Benefits

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.

6. Psychological and Emotional Factors

Being debt-free can provide peace of mind.

It reduces financial obligations and stress.

However, consider if this aligns with your long-term wealth-building goals.

Balance emotional satisfaction with financial prudence.

7. Final Insights

Maintain your emergency fund intact.

Evaluate the interest saved from prepayment versus potential investment returns.

Consider reducing EMI and investing the surplus if it aligns with your goals.

Ensure any decision supports your long-term financial objectives.

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