Hi All.

I have a home loan of 35Lakh (2yr old loan) from LICHF. I have 15 lakh of extra fund available with me and I am confused whether to prepay the home loan or invest the amount in real estate. I have short listed the following options-
1) Prepay the home loan from this amount.
2) Invest this amount in 1BHK flat in Bhiwadi/Neemrana/Noida in CLP plan.
3) Prepay 5lakh against home loan and invest remaining amount in plot in Bhiwadi/Neemrana in CLP plan.

I am getting 15000/- PM of rental income from this property.

Please suggest……………….

Regards,
Deepak
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  • Deepak,

    A lot of people are facing this dilemma due to interest rate scenario and current real estate footing. Here are my views:

    1) if you prepay 15l, this is a huge amount. You need to consider if any prepayment penalty is levied? I have a loan running from LICHF and as per agreement, I can't pay more than 10 percent of outstanding balance in any given year before fixed tenure of 5 years. Additionally, are you availing any income tax benefits on principal and interest component? That reduces your overall cost of this loan. Assuming you pay about 10 pc fixed and your earnings are more than 10 lacs per annum, this can easily knock down 1-2 pc cost. So you are looking at close to 8.5 pc cost on a reducing balance basis. Why not invest in tax free bonds or FDs which are likely to give you a similar return on a compounded basis.

    2) Given the current real estate turmoil, I won't suggest investing in above mentioned locations. Even if market bounces back, typically most sought after locations are the first to give you returns. So may be some better locations in Delhi, Gurgaon or Noida. But your budget is not the right fit. Hence, I would suggest to skip over this option.

    3) It definitely makes sense to prepay some amount, especially if your loan is on floating basis. In light of 1 above, pleese look at agreement and decide. Again, I would suggest to skip over the real estate investment in these locations.

    From my perspective, think about the following and modify as per your individual circumstances and risk appetite. Consider this another option. Prepay some amount of loan, split rest of money between FD, tax free bonds and stocks. This is not going to block your money for a long time so liquidity can still be maintained. Be on a lookout for real estate markets to improve and may be then think about investing. Cheers,
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  • Hi Saurabh,

    Thanks for your valuable inputs......

    Below are the replies to your queries.

    1) if you prepay 15l, this is a huge amount. You need to consider if any prepayment penalty is levied? I have a loan running from LICHF and as per agreement, I can't pay more than 10 percent of outstanding balance in any given year before fixed tenure of 5 years. >>> My loan was on fixed rate for two years and now it will be floating from 1st April onward. I checked with LICHFL and there is no prepayment penalty

    Additionally, are you availing any income tax benefits on principal and interest component? That reduces your overall cost of this loan. Assuming you pay about 10 pc fixed and your earnings are more than 10 lacs per annum, this can easily knock down 1-2 pc cost. So you are looking at close to 8.5 pc cost on a reducing balance basis. >>> As I am working out of India so I am not availing any tax benefit and as of now no plan to return India for next 2-3 Yrs.

    Why not invest in tax free bonds or FDs which are likely to give you a similar return on a compounded basis. >>> This I was also thinking as I can get 9% interest free interest rate in India because of NRI account

    2) Given the current real estate turmoil, I won't suggest investing in above mentioned locations. Even if market bounces back, typically most sought after locations are the first to give you returns. So may be some better locations in Delhi, Gurgaon or Noida. But your budget is not the right fit. Hence, I would suggest to skip over this option. >>> I am also not very much bullish about Bhiwadi or Neemrana.

    3) It definitely makes sense to prepay some amount, especially if your loan is on floating basis. In light of 1 above, pleese look at agreement and decide. Again, I would suggest to skip over the real estate investment in these locations. >>> Agree

    From my perspective, think about the following and modify as per your individual circumstances and risk appetite. Consider this another option. Prepay some amount of loan, split rest of money between FD, tax free bonds and stocks. This is not going to block your money for a long time so liquidity can still be maintained. Be on a lookout for real estate markets to improve and may be then think about investing. Cheers,

    One more small thing I have contingency fund separate to this 15 lakh.

    Regards,
    Deepak

    From my perspective, think about the following and modify as per your individual circumstances and risk appetite. Consider this another option. Prepay some amount of loan, split rest of money between FD, tax free bonds and stocks. This is not going to block your money for a long time so liquidity can still be maintained. Be on a lookout for real estate markets to improve and may be then think about investing. Cheers,

    One more small thing I have contingency fund separate to this 15 lakh.

    Regards,
    Deepak
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  • Friends,

    I've a completely different perspective to offer (not the choice, but perspective). I think you should think what will make you feel happy and satisfied. If I were you, having a loan on property, I would pay off the loan ASAP and and feel free. Whatever I earn then can be used to invest in RE or FD later. The worst will be that I may get a smaller property if rates increase, but I will be having peace of mind.

    Life is limited, maximize happiness and good health, everything else is negotiable.

    Just my 2 cents.

    Cheers!
    CommentQuote
  • Hi Deepak
    This is really very nice discussion. i think if you have the appetite then you should go for another real estate option. I think gurgaon and noida are good options as these will be more expensive location with time and in future.
    Do your research you will get a 2 bhk in 50-70 lac budget in nice area in gurgaon or 40-50 lac in noida.
    Property rates never come down , they always appreciate with time.

    you can also take more loan if your salary is good and then later when u need money u can sell ur new real estate option

    so i think you should go for another real estate option. But at the sametime work out ur options like how much money i have in hand, what r ur goals for next 10 yrs etc etc
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  • Originally Posted by userHJ
    Friends,

    I've a completely different perspective to offer (not the choice, but perspective). I think you should think what will make you feel happy and satisfied. If I were you, having a loan on property, I would pay off the loan ASAP and and feel free. Whatever I earn then can be used to invest in RE or FD later. The worst will be that I may get a smaller property if rates increase, but I will be having peace of mind.

    Life is limited, maximize happiness and good health, everything else is negotiable.

    Just my 2 cents.

    Cheers!


    My friend, I like your approach! Definitely, happiness and good health should take priority :). But unfortunately, the world is such that we need to keep beating inflation and grow our money just to be able to maintain same living standards for us and generations to come. Think of rupee depreciation, across the board price increase in basic commodities and of course, the last 10 years real estate miracle which further widened the gap between risk seekers and safe players! Leverage, if practiced in control, is quite important and should not be avoided.

    Regards,
    Sourabh
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  • Paying off home loan or allowing it continue and taking tax break is an approach to finances.
    RE investment is among the biggest chunk of money which will be used for deployment in one specified avenue for salaried people.
    Lot of thought,preparation is necessary for this purpose.
    Uncertainties of life also need to be focussed upon.
    You take a home loan and buy and then you loose your job,what happens??
    God forbid some other medical problem comes up-How will you repay/
    While 99% hopefully dont get into medical problem-job losses do take place.
    Considering all this and I personally keep health and peace of mind the top most priority.If i have a loan and have a stable job,then I will keep loan running for longer periods of time.But this precept will be evaluated from time to time.
    When loan is running you are not full owner of house/flat.
    Take a decision which boost your finances.
    Take a decision which gives you a debt free feeling also.I fully agree with some posters above who prioritise health as more important and peace of mind as important.
    Money can give you access to comforts,but health can give you ability to use them and enjoy life.
    When it is health v/s wealth,health should take precedence.
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  • Originally Posted by sourabhv
    My friend, I like your approach! Definitely, happiness and good health should take priority :). But unfortunately, the world is such that we need to keep beating inflation and grow our money just to be able to maintain same living standards for us and generations to come. Think of rupee depreciation, across the board price increase in basic commodities and of course, the last 10 years real estate miracle which further widened the gap between risk seekers and safe players! Leverage, if practiced in control, is quite important and should not be avoided.

    Regards,
    Sourabh


    Dear Saurabh,

    I agree that rules/trends of economics are important while taking such decisions. That's why I said that I have a different perspective, not the choice. I may still need to choose amongst the available options, but my objective will be to maximize my happiness and good health over other things in life. And yes, every individual has right to choose his/her own balance.

    Have a happy and satisfying long term decision.

    Cheers!
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  • Go for a home saver loan product
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