I booked a flat by paying Rs 7 lakh as downpayment. I plan to take a loan of Rs 15 lakh for 8 years for the balance. I could have paid Rs 5 lakh more, but I wish to invest that money for higher returns. Is this a better strategy?
—Anil Dave, Pune
There are several factors that should be taken into account before you take a decision. The most important is your ability and inclination to take risk. Investing the Rs 5 lakh in any market-linked option (like mutual funds or equities) amounts to putting your capital at risk. No doubt, your money could earn potentially higher returns but there is a market risk that cannot be ignored. You have basically three options:
Option I
Increase downpayment, reduce EMI
If you make a bigger downpayment of Rs 12 lakh, the EMI would come down from about Rs 23,000 to about Rs 15,500—a saving of Rs 7,500 every month. This money could be invested in any good mutual fund through a monthly SIP.
Result: You would have a surplus of Rs 7,500 every month which could be invested
Option II
Increase downpayment, reduce loan term
You also have the choice of retaining the EMI at Rs 23,000 and reducing the term of the loan. From eight years, the loan tenure would come down to just four and a half years. That’s 42 EMIs less than the original loan term.
Result: You would be out of the loan in less than 5 years
Option III
Take bigger loan and invest savings
Investing the money in a market-linked option can be very rewarding, especially at a time when there is a lot of pessimism in the market. Few people realise that investing during market downturns and bearish phases can be the most profitable in the long term. If your investment earns about 15% while you pay 10.25% on your home loan, you stand to gain a good 4.75%.
Result: Your investment could reap rich rewards while you retain liquidity
But you also need to factor in inflation while making your calculations. If your investments earn 4.75% a year while inflation is at 5%, then you are actually losing 0.25%. Then there are tax implications. Home loans are eligible for tax exemptions if the house is selfoccupied.
If you start living in the flat, up to Rs 1.5 lakh of the interest paid on the home loan is deductible from your income. A Rs 15 lakh loan for eight years will fetch you a Rs 1.47 lakh tax exemption in the first year. When you factor in the tax saving, the effective rate of interest on the loan would be lower than 10.25%.
Also, if you choose to invest the money in a mutual fund rather than make a bigger downpayment, you would retain higher liquidity. The investment can be redeemed in case of a financial emergency. But don’t invest the entire Rs 5 lakh in equities as a lump sum. Invest the amount in an MIP and then start a systematic transfer plan of about Rs 10,000 a month into an equity fund. Over time, the MIP investment would get completely transferred into the equity fund. If your returns are very high, you could even consider redeeming some funds to prepay your home loan.
Opt for a floating rate loan, and make sure there are no prepayment penalties
This is an interactive section for investors. Do you have a query regarding your investments? Write to us at letters.moneytoday@intoday.com and we will give a detailed answer.
