Money matters: Should I prepay a portion of my home loan and start building my retirement fund again from scratch?

Query: I am a 27-year-old male with a home loan of Rs 54 lakh. My monthly salary is Rs 1.34 lakh, and my wife earns Rs 80,000 per month. Currently, I have savings of around Rs 20 lakh in stocks and mutual funds, while my wife has Rs 6 lakh in fixed deposits for emergencies and Rs 5 lakh invested in mutual funds.

My home loan's monthly EMI is Rs 52,600, with a significant portion going towards interest. I contribute Rs 50,000 monthly to mutual funds, while my wife invests Rs 30,000.

I am considering selling Rs 10-15 lakh worth of mutual funds and stocks from my savings to prepay a portion of the home loan. This would help reduce the interest component of the EMI. I seek a detailed analysis of the advantages and disadvantages of this decision, as well as suggestions for a balanced financial strategy.

Advice by Mr. Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance.

Thank you for sharing your detailed financial situation. Let's analyse your query about prepaying your home loan versus maintaining investments through a holistic financial planning lens.

Current Financial Snapshot:

- Combined Monthly Income: Rs 2.14 lakh

- Home Loan EMI: Rs 52,600 (24.6% of monthly income)

- Monthly Investments: Rs 80,000 (Rs 50,000 + Rs 30,000)

- Total Financial Assets: Rs 31 lakh (Rs 20 lakh in equity + Rs 11 lakh wife's savings)

Before deciding on prepayment, let's evaluate your finances:

1. Emergency Fund

- Calculate your fixed monthly expenses (including living expenses and EMIs)

- Multiply this by 6 months to determine your required emergency corpus

- Keep this amount in easily accessible instruments like FDs or arbitrage funds

2. Insurance Coverage

Life Insurance:

- Consider factors like loan obligations, income replacement needs

- Account for future goals like children's education

- Get personal term insurance despite having corporate coverage

3. Health Insurance:

- Get a family floater policy independent of employer coverage

- Consider top-up plans for enhanced protection

- Factor in medical inflation when deciding on coverage

4. Loan Prepayment Analysis

Advantages:

- Reduced interest outgo

- Lower EMI burden or shorter tenure

- Greater financial flexibility in future

Disadvantages:

- Reduced liquidity for future opportunities

- Lost potential for higher returns from equity investments

- Less financial buffer for unexpected expenses

5. Future Goals Alignment

Before prepaying, consider:

- Upcoming major expenses (family planning, education)

- Career growth plans and potential income changes

- Long-term wealth creation objectives

6. Behavioural Aspects

To get peace of mind, consider your comfort with:

- Debt obligations versus investment risks

- Need for immediate debt reduction versus long-term wealth creation

- Financial decision-making style as a couple

Recommended Strategy:

1. First secure adequate emergency funds and insurance coverage

2. Align prepayment decision with future financial goals

3. Consider partial prepayment that balances peace of mind with investment opportunities

4. Continue systematic investments for long-term wealth creation

5. Review and adjust strategy periodically based on changing circumstances

For a comprehensive strategy that addresses financial and behavioural elements and promotes long-term financial stability, seeking guidance from a financial advisor is recommended. Their expertise can help tailor a personalized approach that suits your individual circumstances and risk tolerance.