Closing a home loan early isn't a good idea

I am 32 years old, and work with a MNC in Mumbai. My take-home salary is Rs 55,000 a month. My monthly household expense is Rs 15,000 and my EMI is Rs 22,700 (loan is Rs 25 lakh, tenure 25 years).

My spouse is a homemaker and we have a son aged 2. We have no other dependents.

My current total savings is Rs 1 lakh of which 40 per cent is in equity. I have taken life insurance for Rs 2 lakh for which I pay a premium of Rs 37,000 per annum. Of the surplus I invest Rs 4,000 in mutual funds.

I am accumulating the rest to pre-pay my principal portion of home loan. My intension is to close the loan in 10 years.

My objectives are to save for my child's higher education for which I may require Rs 40 lakh and for my retirement at 58 years with a corpus of Rs 1.2 crore. Also, I am planning to take a foreign tour in the next four years for which I need to save Rs 10 lakh.

What is a suitable financial plan based on the above parameters? My salary will grow at the rate of 10 per cent per annum.

— Amol Kulkarni

It is important to understand when and how to close a liability. Your liability is eligible for tax benefits and is likely to bring down the interest costs. Hence, it is better to evaluate alternative investment and yields before planning to close liability.

For instance, in next 16 years you will be paying an interest of Rs 1.5 lakh on your home loan. As long as the current tax benefits are extended for home loan interest repayment, it is better to avoid pre-payment of the loan. Instead start building a corpus with the surplus.

Consider this, if you invest the difference in EMI for 25 years and 10 year loan of Rs 10,320 in equity for next 180 months at a return of 12 per cent, you will have a corpus of Rs 55 lakh. If you let-out your house it will help you claim the entire interest paid as deduction from your gross salary. Considering your low current liquidity, it's better to create corpus rather than opt for pre-payment.

To protect your family and to reach all your goals take a term insurance for Rs 1.1 crore.

Education: You can start with higher allocation to equity at 80 per cent and gradually bring it down to 60 per cent closer to the time of attaining your goal. If you save Rs 8,000 a month for the next 180 months at 12 per cent, you can reach your goal comfortably.

Retirement: Even if you wish to maintain the current standard of living, your annual living expenses of Rs 1.8 lakh will be Rs 10.45 lakh at retirement. To have such a pension till your life expectancy, you should have a corpus of Rs 1.85 crore and it should earn a return of 2 per cent over inflation.

To reach your retirement corpus in the next 26 years you ought to save Rs 5,600 a month and it should earn a return of 12 per cent.

Foreign tour: As you have limited surplus, postpone your trips and savings for this accordingly.

****

I am 56 and am employed by the Central Government. I will be retiring by 2015. My wife is working in a public sector telecom company and is aged 53. We have one son, and he is working in a software company in Chennai.

Out of my salary I save Rs 14,000 in GPF and my wife saves Rs 17,000 from her salary. Our current balance is Rs 14 lakh. Our current monthly expense is Rs 10,000.

We have two flats for which we pay EMI of Rs 7,500 and the outstanding loan is Rs 5.5 lakh. It will be completed in seven years.

My concerns are: My flat is 17 years old and I am planning to sell it and buy a new one. Is it advisable to buy the new apartment in my name or my son's name?

After retirement, our monthly pension will be Rs 39,000. Is this sufficient for the both of us? Do I have to change my investment or is it fine?

I may live up to 85 years. As per my wife's employment contract, we are eligible for medical benefits till our life.

Padmanabhan. V

Solutions: Selling the flat will attract capital gains. The difference of the sale consideration and indexed cost will be the capital gains. If you reinvest capital gain you will be exempted from tax. But if you wish to avail a loan, it is better to buy the flat jointly with your son. He will be eligible for tax benefits for the interest paid on loan EMI, if the Direct Taxes Code is implemented in the current form.

Now for your retirement corpus. As you and your wife are Central Government employees, inflation will be adjusted in the pension to a reasonable extent. However, you might face a shortfall only if you live past 80 years. To meet such a shortfall, deploy the surplus in the earlier years in mutual fund monthly income plans.

Of the eight investments five are ULIPs. As you have started everything in the last two years, continue paying the premium till your retirement. In mutual funds, continue your investments in Birla Sun Life Frontline Equity and HDFC Prudence. Switch your investment from Franklin Templeton Prima Plus to HDFC Top 200.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





Related

This article is closed for comments.
Please Email the Editor