BackI'm 45 and have a surplus of ₹10 lakh. Should I start SIP or prepay home loan?
Opt for prepayment in case your monthly SIP contributions seem adequate and/or your risk appetite has reduced due to the stretched market valuations
PremiumI am 45 years old and I invest ₹40,000 per month in mutual funds through SIPs. I have an outstanding home loan of ₹40 lakh of 5 years old with 15 years of tenure left. It is costing me an interest rate of 8.5%. I have a surplus of ₹10 lakh and I am not sure whether to invest it in mutual funds through SIPs despite the stretched valuations or use it for prepaying the home loan to reduce my debt burden. Please suggest.
-Name withheld on request
The ongoing low-interest regime led many banks and HFCs to offer home loans in the range 6.4-7% p.a. Even existing home loan borrowers can benefit from it by transferring their existing loan to lenders offering lower interest rates. Hence, the first thing I recommend is to contact your existing home loan lender regarding the possibility of reducing your interest rate. If they refuse, then contact other banks and NBFCs with whom you have deposit or lending relationships regarding their home loan offers.
Follow it up by visiting online financial marketplaces to compare home loan rates offered by other banks and HFCs. Also use online home loan prepayment calculators to find out the scope of savings from transferring the home loan, after factoring in the processing fee and other charges to be charged by the new home loan lender. Exercise the balance transfer option only if the savings in the interest cost is significant.
As far as using your existing investible surpluses is concerned, the decision should be based primarily on whether your existing investments and monthly contributions are adequate to achieve crucial financial goals like post-retirement corpus, children’s higher education corpus, etc. If they seem inadequate, then try to increase your monthly SIP contribution. Opt for prepayment in case your monthly SIP contributions seem adequate and/or your risk appetite has reduced due to the stretched market valuations. Prefer the tenure reduction option as it leads to higher interest cost savings than the EMI reduction option.
Naveen Kukreja - CEO& Co-founder, Paisabazaar.com.
(Queries and views at mintmoney@livemint.com)
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