Mortgage: Do not pre pay your home loan!

I am normally against loans for buying things – all my blogs say that. So if you think I am breaking my own rules, well let me clarify. I will give you reasons for NOT repaying the loans in a hurry. The reasons are simple:

1. We will continue to inflate, so if you have a fixed mortgage, do not panic! If you have taken a Fixed Rate Mortgage (say at 13%) recently hold on, do not be in a hurry to repay the loan.

2. Compared to all other loans, Mortgage loans will be the cheapest. So do not repay your home loan and borrow for a car, or a holiday or even for children’s education. Nothing comes as cheap as a home loan.

3. Build some cash reserves in a money market mutual fund for emergencies. There is a general tendency among many people to repay all the loan and suddenly not know from where some important expense will be paid from!

4. When you first borrowed, you were scared, were you not? Most people are very scared when they borrow for the first time. However, when they repay they are confident. Once the loan is repaid and the excess amounts are available you itch to buy a new property! So if you have taken a 25 year mortgage, and in the 7th year you are able to repay the whole loan, rest assured you will borrow again for a bigger house – maybe in 2 years time. If you have any intentions of taking a bigger loan, DO NOT repay the old loan till the date of the new loan.

5. Though I am against borrowing just for tax purposes, current tax position is that your mortgage payments are looked at more favorably than other loans and their interest payments. So let the mortgage run…especially during inflation.

6. Immaterial of whether you repay the loan or keep it, your asset will appreciate (or depreciate!): So it actually does not matter whether you keep the loan or not.

7. However having kept the mortgage (at 13.5%) do not invest in a RBI bond (which pays you 8% taxable). Put that money in a SIP in an equity fund. In 7-10 years time you will look smart, even though in the short run you may have looked bad!

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One Response to “Mortgage: Do not pre pay your home loan!”

  1. Hi,
    I and my mother have taken a home loan a couple of years ago and are currently pre paying it, coz in a couple of years I will individually take another home loan (hopefully). We do have enough liquidity as you mentioned.
    One problem that i am facing is i am in contract employment which is renewed yearly. since i am not a permanent employee, i am not eligible for loan right now. is there a way around this?

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