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Is it wise to complete house loan payment early?
Posted on: 17/Feb/2014 5:46:01 PM
Almost every individual has availed home loan. It is an established trend to take home loan immediately after getting a job. The loan will generally run for 20 years, at the interest rate of Rs. 1000/- for each lakh.
Overall, the interest will come to about 10%. This works out to be 250% of the loan amount taking both the principal and the interest. For example, if a loan of Rs. 50 Lakh is taken, the total payment including interest in 20 years will be Rs. 120 Lakhs.
Many people try to settle it within 10years or below considering this interest rate to be very high. Some others prefer to pay the loan over the 20 years. After the first few instalments, they get inured to the regular EMI payment.
It is advisable to delink any emotional approach while availing home loan. After all, emotions are only for the person and not for the money involved which go to be paid back.
After ensuring that we delink any emotional approach to home loan, we can analyse to find out whether it is really beneficial to pay back the home loan earlier.
Let us take the scenario – EMI Rs. 49,919/-, Interest Rate 1o.6% and the duration 20 years:
Alternative # 1 àAfter receipt of loan, pay the advance. Invest the balance money in PPF (interest rate 8.7%). Continue till the Home Loan is settled over a period of 20 years.
Alternative # 2 à Invest in Mutual Funds (expected compound interest 17%) and a dividend of 2% extra.
Consider that Rs. 5 lakhs is paid as the loan payment every year from the 2nd year of taking the loan: Consider that Rs. 8 lakhs is paid for the 6th & 7th year. The balance of Rs. 3.68 lakhs will be paid in the next 8 years. The total amount paid over the 8 years will be Rs. 73.32 lakhs. This is higly satisfactory under the premises that the interest paid was relatively lower. In this process, we find that if we had invested the EMI amount over the same period, we would have earned over Rs. 2 Cores or even more if we had invested in funds offering compound interest.
Summary
- It may not be wise to settle home loans early.
- It is better to get the maximum house loan we are entitled to.
- It is better to pay the EMI over a longer period.
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