Look at the pros and cons of both the options and take a decision yourself! :-)
It was in the year 2009 that you took a Rs 20,00,000 housing loan. Now 5 years later you are very comfortable with the Rs 23,000 per month EMI that you are paying. You and your wife find that you can easily increase the EMI to Rs 33,000 without a sweat.
Should you increase the EMI and repay the loan faster or should you do a SIP for Rs 10,000?
Well most people are tired of my 'advisory' posts, so let me NOT tell you what to do.
Instead look at the pros and cons of both the options, and take a decision yourself!
Repaying the loan
1. Most of the Indian middle class considers the loan as a burden, so prefers to repay quickly. If you are one of those persons, obviously you will repay the loan.
However what you should be seeing is 'Is the Rs 10,000 giving me a better yield (profit after tax) in the investment or am I better off repaying the loan thus increasing my net worth?'
2. If your CTC is Rs 10,00,000 and your wife is earning say Rs 500,000 -- the loan amount outstanding is very very small. It is just 15 months' income. Do not let the absolute amount worry you. Translate it to 'how many years' income?'. Up to 5 years is fine.
3. If you are planning to buy a bigger house in say five years, do not repay the loan and then take a big loan again. Instead keep a part of this loan pending and go to the same lender. You can expect a waiver of processing fees, and get such other concessions.
4. Your house will appreciate/depreciate -- the repayment has nothing to do with that process.
5. You will save on interest expenses, no doubt about that. However if your loan is at about 10 per cent, remember inflation is also at about 9 per cent. So interest rates in India are at historical lows.
6. You may sleep easier -- that depends on your personality -- like point 1.
So you and your spouse have to take this emotional call.
What happens if you invest for retirement?
1. Say you put this money in an ELSS, it means you are building an all equity portfolio for the next 15 years. Nice time frame to build a nice equity portfolio. Equities, historically, over 15 year terms should give you about 2-3 per cent real returns (nominal interest rate minus inflation).
2. Power of compounding over the next 15 years even with just a small 1-2 per cent difference can work out to a nice return.
3. From the tax point of view both are the same. The interest payment as a tax deduction is a lousy reason to keep the loan, whatsoever your CA tells you!
What would I have done?
I would have invested in an ELSS if I needed a tax break or invested in a nice equity well managed fund.
Photograph: Ken Teegardin (www.SeniorLiving.Org)/Wikimedia Commons
