Home Loan : To Prepay or Not to Prepay ?

There are a lot of Articles written on the Topic of Home Loan prepayment or Invest on various blogs, however still this is one of the most common Question asked in Personal Finance Forums.

Let us try to simplify the same from our end with the following example.

Abhishek buys a House by taking a Loan of Rs. 40 Lacs, the Interest rate payable is 8.5 % pa, the tenure is 20 years.

In this case the EMI works out to Rs. 34,713 so Total payment is Rs. 34,713 X 240 = Rs. 83,31,120

So if Abhishek services the Loan for full Tenure of 20 years he is paying an Interest of Rs. 43,31,120.

lets Assume somehow Abhishek gets Rs. 40 Lacs, and now wants a solution - to close the loan and save the interest or invest the money and service the loan for full tenure.

What do you think ? What should Abhishek do ?

1. If he pays off the loan he is able to save Rs. 43,31,120
2. If he invests this Amount and is able to earn a return of 4 % he will be able to earn Rs. 47,64,493 in 20 years
3. If he invests this Amount and is able to earn a return of 6 % he will be able to earn Rs. 88,28,542 in 20 years
4. If he invests this Amount and is able to earn a return of 8 % he will be able to earn Rs. 1,46,43,829 in 20 years
5. If he invests this Amount and is able to earn a return of 10 % he will be able to earn Rs. 2,29,10,000 in 20 years

So on the basis of the above calculations you can decide what you need to do

KISS (Keep It Super Simple)

• Which Stock should I Buy ?
• Which Mutual Fund Scheme should I Buy ?
• Which Children's Plan should I Buy ?
• Which Pension Plan should I Buy ?

These are the Common Questions mostly asked by people, now what actually are the right Answers for these Questions ?

Lets try to have a look at the above Questions from a different point of view,

Don't you feel these Questions are same like some one asking 'Which Vehicle should I Buy ?'

Now what can be a right answer for the same ? What will you suggest ? or will you need some more information to answer this question ?

I feel you need some more information like,

• Why he needs a Vehicle, for his daily commute to Work or Weekend Travel with Family ?
• How many Average Kms he is expected to Travel Daily / Monthly
• What is his Budget

Now at least you can workout something based on this additional information.

In the same way additional Information is required

• Why you need to Buy Stock, Mutual Fund Scheme, Children's Plan, Pension Plan ?
• How much Amount you need to Accumulate and by when ?
• How much you can save every Month / Year for Accumulating the respective Amount ?

Once you have this additional information you can workout what Product to select which will help you to Accumulate the required Amount in the respective Time in a Optimum way.

So just KISS, Keep It Super Simple.