I am 40 years old with a five-figure salary from a relatively secure company, and no other financial liabilities like parents or elderly children, I have a paternal home in South Delhi to live in and have raised a Rs3 crore home loan to build a complex business, which is likely to earn good rent. I am seeking your advice on repaying the EMI loan, should I start repaying now from my substantial savings or continue with the loan and invest my surplus in other asset classes eg medium mutual funds term for my retirement and my hobbies. I am new to the equity market and not interested in real estate etc.
1) The interest rate on a mortgage is 8%
2) I have life coverage
3) My emergency funds can last from 6 to 9 months
4) My health insurance is covered by my employer
Again thank you very much for your help and assistance cordially.
Response from Harshad Chetanwala, Founder of Mywealthgrowth.com
Many people wonder whether to pay back the loans or invest in avenues that yield a higher return than the interest rates on the loans. Although the solutions are subjective as they depend on several factors, additional information on the remaining term of your loan would have been more useful.
Home loans are structured so that you pay most of the interest in the first few years. Just to give you an example if the loan is for 20 years without any partial repayment after 5 years of EMI payment you would have repaid just 12% and 30% in case of 10 years loan. So those who are in the early years of their loan can use partial prepayment to reduce the impact of interest.
You have no financial commitment to parents or children and you are looking to invest for your retirement. An aggressive strategy may involve comparing the current 8% mortgage interest rate against the 10-12% long-term return potential of stocks and therefore investing in stocks. If you get a tax advantage on paying interest on a home loan, that also adds to your overall return. However, note that this is a high risk option as stocks are an extremely volatile asset class. Only take this route if you have an extremely high risk appetite.
Avoid direct stocks and use the mutual fund route to invest your excess. You can invest in Nifty Index Fund (all AMC), Parag Parikh Flexicap Fund, UTI Flexicap Fund, Mirae Asset Large Cap Fund and Canara Robeco Emerging Equities Fund to start. You can invest 50% of the lump sum right now and do a 6 month SIP for the remaining 50% on these funds. You can also set up regular SIPs in these funds for your monthly surplus.
Just a word of warning, if you are looking for an investment horizon of less than five years, you may need to follow a cautious strategy as you cannot invest all of the excess in short-term stocks. For such a time horizon, a combination of investments in stocks and debt securities works best and the performance of this portfolio will be lower than that of all equity portfolios. It is possible that these returns are closer to the interest on your mortgage. In such a case, it would be better to use the money to pay off the loan.
At the same time, it is important to keep an eye on the evolution of mortgage rates. If interest rates rise in the future, you may need to reconsider your investment strategy, as in the past mortgage interest rates were around 9-9.5%. In such a case, it may be better to use the excess to pay off the loan as there is a marginal difference in the return on your investment and an increase in the interest rate on your home loan.
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