Thread: Home Loan - To pre-pay or not

I got the idea of the thread from the article on Rediff:

Why you should not prepay your home loan: Rediff Getahead

In the above article, the author argues against pre-payment of home loan. You can read the article and come to your own conclusions - and most welcome to post them here - nay, I implore you to post any view on the subject, however trivial.

I tend to agree with the author on some points:

• It is not favourable to pre-pay the loan after 3rd year (assuming a 15 year tenure). This is because (as the author pointed out), majority of the interest component is paid back in the leading years.
• Many banks/institutions will charge any pre-payment charges.
• Home loans are the cheapest of all loans because they are secured. You may get a home loan at 8% to 10% but car loan, personal loan, etc. are at least 3 points (3%) higher.
• If you are one of the lucky ones who have a fixed rate loan (like me), never pre-pay the loan.
• Home loan enjoys some tax rebate:
  
  • For those who have taken loan for self occupied property, interest up to Rs. 1,50,000 is deductible under section 24 of Income tax. And under section 80, the principal amount can contribute up to Rs. 1,00,000/-.
  • For those who take a loan for 2nd/3rd/4th properties, they derive income from house property (irrespective whether rented out or not). But in this case entire interest amount is deductible from the income under house property. (<-- Start another thread and I will explain more).
  • No such benefit for other loans (assuming salaried class here).

But where I differ with the author is in case of floating rates. Many people have been affected by floating interest rate loans in the last four years. In this, it is better to seek the amortization schedule.

Because of floating rate, not only has the EMI soared, the tenure has increased as well. I know people, whose tenure increased from 15 years originally to 24 years. In this case, it will be financial madness not to pre-pay loans, especially if you can.

For your benefit, I have created a spreadhseet with a loan amortization chart. This chart assumes a home loan of Rs. 20,00,000 for a period of 15 years at a fixed rate of 10%.

How to use this spreadsheet:

1. Edit the rate, principal amount (loan amount) and tenure in the top row.
2. Principal amount must be entered in negative as shown.
3. If you have floating interest rate, e.g., in first 15 months you paid at 9% and now your rate is 11%, then create another tab by copying this tab. Start with the new rate and enter the value of principal as the principal outstanding at the end of 15 months.
4. To check how much interest you have paid till now, and how much is balance just navigate to the proper row.
5. Any help, I will be glad to provide help.

p/s. Do not worry. I can guarantee that the XLS is free of virus.

Please rate this thread.

Home loan or car loan or anything below 14% should never be prepaid if you have a little bit of financial discipline.. I said discipline because making more money then the 14% you are paying requires strict adherence to a few golden rules of investments and in the long term one can very easily average at about 22-25% annual rate of return on their investments compounded annually.(Indian equity based diversified funds)
Even if some one picked up 3-4 good mutual funds I would say beating 14% would be a piece of cake provided you have a certain amount of discipline and do not waver from the plan.

And the 22-25% is for people like you and me ... There are people who double their money every year I am sure there are some on this forum as well.... ????

nice info..........thanks to both of you guys