Why early repayment of House Building Loan is bad for your financial health Part 3
- Sep 22, 2021
- In Personal Finance by Malhar Majumder
Takeaways:
- The benefits you reap if invest the differentials
In the earlier writeups we discuss about quantifying loans, discounting it to present value numbers. We saw how diminishing rupee valuation actually bring down the real returns over the years.
In this writeup, we will study the impact of investing the differentials EMI, instead of blowing it up.
In this writeup, we will study the impact of investing the differentials EMI, instead of blowing it up.
Mr Niraj's yearly outgo (EMI*12) for 15 years is INR 10,61,891/-
If he stretches his HBL for 20 years, his yearly outgo (EMI*12) is INR 9,12,436/-, a saving of around INR 1.50 Lakh per year for 15 years. However, he needs to keep on paying for an additional 5 years at the tail. However, if Mr Niraj is prudent enough to invest this additional money and obtain around 10% returns, his investment at the end of 15 years will stand at around 50 Lakhs. He may either use this fund to pay off his future loans or he may carry on with the investment for another 5 years, may be without adding further funds.
First case (HBL for 25 years instead of 15 years)
Mr Niraj's yearly outgo (EMI*12) for 15 years is INR 10,61,891/-
If he stretches his HBL for 25 years, his yearly outgo (EMI*12) is INR 8,29,094/-, a saving of around INR 2.33 Lakh per year for 15 years. However, he needs to keep on paying for an additional 10 years at the tail. However, if Mr Niraj is prudent enough to invest this additional money and obtain around 10% returns, his investment at the end of 15 years will stand at around 76 Lakhs. He may either use this fund to pay off his future loans or
I have shared the facts and case rests. I trust the analysis will help in dealing with your HBL better. If I get your responses, I can further delve into the subjects and try to arrive at a sweet spot – which can precisely pinpoint the loan tenure.
I have factored in some assumptions like HBL rates in future, the possibility of Mr Niraj's earning flows etc. However as per experience goes, these assumptions I have taken are on the conservative end. Also, one more thing, if both the partners availing loans are working and at the highest income tax brackets, the results would be sweeter.
With this note of hope and sun, wish all of you a happy financial life!
