Last week we discussed how Ajay and Neha had taken a home loan of 50 lakh and paid EMI of 45k monthly for 20 years. They also started an SIP of 5k for the same tenure.
After 20 years they had paid off the principal amount of 50 lakh, plus interest of 58 lakh, a total of 1.08 crore. The SIP of 5k gave them close to 58 lakh in 20 years, equal to the amount they had paid as interest over the years on their home loan.
Now some of you have asked – What if they would have paid that surplus of 5k towards their home loan instead of starting an SIP?
Well, in this case, they would have paid off the home loan in 15.5 years. After the loan had been paid off, they started to invest 45k plus 5k for the remaining 4.5 years which gives an amount of close to 37 lakh (assuming 13% CAGR).
Since the home loan was paid off in 15.5 years, they will not get the tax benefit under Sec 24 on the interest component for the remaining 4.5 years which comes to 87k (20% tax bracket) and 1.31 lakh (30% tax bracket).
So the net benefit would be close to 36 lakh (37 lakh – 87k) against 58 lakh.
Counter argument – some people may not be comfortable with a large housing loan and to reduce their stress, they may want to get rid of the loan burden at the earliest. In that case paying off the home loan would be the best option.
From the personal finance point of view, One should only consider prepaying their home loan if current investments or opportunity cost fetches a lower return than the actual (after tax effect) interest burden.
