I get this question so often…and I have written about it too in the past…but here once more.
Whether to repay off a home loan or invest the money in a retirement fund is a question which is IMPOSSIBLE to answer without knowing the full facts.
If a person has a home loan on a fixed interest basis of 7.5%p.a. – it makes no sense to repay this LOAN AT ALL. Even a surefire investment like PPF pays more than 8%p.a. This means all the surplus that you have should nicely go into some investment like an equity SIP, direct equity and in a worst case into your PPF account.
If you have a home loan on a floating rate basis – you could be paying about 11.5% p.a. interest now. Here the question is a little tricky. Will a good quality equity SIP give you yields in excess of 11.5% p.a.? Though I would like to say ‘yes’ – I am not in a position to say ‘Yes, surely, always – in a 5 year time frame’. So here I am a little divided. However if you are 28 years of age and have 30 years to pay off the mortgage, the investing option is WORTH taking. Over say 5 years if you get 14% p.a. CAGR return, review your mortgage after 5 years.
At that stage your salary would have doubled and the mortgage will look very small compared to your take home salary.
However, if you are 52 and have 6 years to repay your home loan, you should use the surplus partially to pay off a loan and partially to invest. One way to think about it is (when you are 52) – why pay 11.5% p.a. when your OWN money is stuck in PF and PPF at 8% or thereabouts.
What happens if you are young (28 or younger – because you have 30 years to repay) is that after 5-7 years if you feel like buying a bigger house, just sell this house, take a bigger loan, and shift. If you have had a loan and repaid – it SHOULD feel foolish to be paying processing fees, etc. all over JUST to continue the same loan. And that is exactly what you are doing.
So should you repay the mortgage or invest is a function of:
1. What is your age (younger should invest)
2. Will you buy a bigger house (want the woman to answer, not the man). If the answer is YES, do not repay.
3. What is the interest rate that you are paying (if floating, you are paying at current market rates anyway).
4. How many years of the loan are left – if it is 4-5 years, it will NOT MATTER…
5. What kind of tax breaks are you availing?
So like a typical economist or a CA i hope to have confused you enough 🙁
Also please understand all this is only with respect to a housing mortgage. If you have a surplus:
repay all personal loans
then repay all credit card debt
repay all loans from friends, relatives, etc.
pay term insurance premium….
invest for your retirement….
then consider these options….
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