I love contradicting myself..but this is not contradicting the earlier post….

When a 38 year old says…’My wife is tired of working…and she is quitting her job. She is getting Rs. 32 lakhs as Provident fund, …etc. should I use this amount to pay down my (our) housing loan of Rs. 44 lakhs..my answer is NO. Capital NO.

Let us take this case. Mr. U is earning about Rs. 55 lakhs CTC and has about Rs. 3 crores in mutual funds, equities, investment real estate…etc. His wife is giving up her job from a position of good comfort – there is no need for her to earn, but he is earning well and will continue to earn well.

The long term rates on all his SIPs are in the region of 12-28% p.a. and his home loan is a flat rate of 8% per annum. A lot of his money is in the higher end of the 12-28% range – the 12% return is in Templeton India Pension Plan. His Hdfc top 200, Hdfc Equity, Prudence, Discovery, Dynamic…are all giving him screaming returns.

Such a person who has about one year’s take home salary as home loans can continue to pay the EMI..at least till the tax advantages in repaying a loan (and interest) is available. More, far more important than that the amount of loan is miniscule compared to his networth and his ability to earn. Very clearly if your portfolio is growing at a rate greater than the rate at which you are paying interest…why argue?

Also leverage with so much of discipline is all right – in fact the bank which gave him the loan – is chasing him with a bigger loan 🙂

So different strokes for different people…

repay all the loans NOW….for some overleveraged, under earning joker…

just hold on to all your loans – for somebody who has a very low leverage…

that is what personal finance is all about, correct?

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  1. Once can claim max.1.5 Lac rupees (Could not find the new rupee symbol) for interest exemption from Tax deductions on home loan interest payments for particular financial year.

    If the interest payment falls below this limit and you have surplus amount then pay of the loan and plan for another home loan depending on your needs and future requirement.

  2. For a person of having 3 crores of investment, 10% of the loan repayment does not matter to him even it earns higher amount than the house loan interest. The bottom line for him would not make any difference if we consider the net gain (earning yield – interest rate). On the contrary, he will have piece of mind that he has home documents with him, no headache of EMI, relief from the loan statements, no worry about CRR hike and most importantly have full satisfacton of drawing the complete salary. For tax gains, other instruments are always available.

  3. i prepaid my housing loan early using surplus income this year because of 2 factors a)the bank had increased the interest rates to 13% and b)i’ve had the experience of losing a job in the early parts of the decade during the dotcom recession.so naturally the 2008-2009 downturn made me worry of potential cashflows -ofcourse the worry turned out to be unfounded and purely a creation of my mind.but i guess,i decided owning a house completely was a better option than worrying about losing the 2.5% advantage due to tax breaks and opportunity costs.

  4. Atul: Its not the 1,50,000 limit thats the most attractive aspect of a loan, basically your CTC or rather your net taxable income that decides how much tax you would end up paying both (a) with & (b) without the home loan. In this particular case, he is surely paying tax at the rate of 30%, with all calculations factored in. So if he is not taking the home loan, he is simply paying 45000 to the year extra for the 1,50,000 that he did not claim via interest/ Sec 24B deductions. Besides, those 32Lakhs will easily get him 12-14% on average in the equities market via the MF route. Would love to have Subra Sir’s kind word on whether this way of looking at it is indeed correct.

  5. Incurring an expenditure because it is tax deductible makes no sense. It is like saying earn Rs. 100 less because you are on the 30% tax slab. 80C deduction makes sense, because the money stays with you. Section 24 makes no sense because the money goes away any way!

    It is a brilliant sales ploy used by the builders and bankers to sell a bigger house with a bigger loan..

    read my other posts on real estate..

  6. Subra Sir, that was not my point. Nonetheless. As regards your articles on real estate, yes I will when I can find time. Thanks

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