- If you are in receipt of surplus money, you might be tempted to pay off your home loan
- Be prepared to loose the tax benefits and bear opportunity cost if you are planning to pay off your home loan
- You will be able to recover your EMIs by investing the surplus money instead of paying off the loan in the same time frame
In the times of rising real estate prices, it has been getting difficult for the burgeoning middle income group to buy a home, especially in cities. Even the Govt. has been putting its thrust on affordable housing and incentivising the tax payers to buy a house through subsidies, income tax concessions and other incentives. This comes through interest rate subventions, tax deduction in respect of interest as well as principal repayment of housing loan. A home loan helps you to take a step towards expansion beyond your income. And, it comes with luring income tax benefits too.
But, some of us might be in receipt of surplus money via maturity of investments or sudden inheritance. This surplus money, you would think, be used to pay off your debts to get rid of the mental stress which a loan often brings with it.
You may be in a position to pay off the loan, but the question arises, should you go ahead and do it?
If you have availed several loans to build your assets, and it is now bothering you mentally, you might consider paying off your loans partially. But question your self: Is the home loan repayment really affecting your day to day living, or can you do along with it? This is because a home loan comes with its set of benefits and given a choice, you should avail these.
Be prepared for loss of tax benefit
Home loan offers you two tax advantages, one is on account of interest you pay on your home loan and the other on the principal. The tax benefit on interest paid is provided up to an extent of Rs 2 lakh under section 24(b),and the tax benefit on principal repayment is provided under section 80C for a limit up to Rs 1.5 lakh.
Let us say you fall in the highest income bracket and you pay 30.9 per cent as tax, then, put together, you would be able to save around Rs 1.08 lakh in taxes i.e. 30.9% on total Rs 3.5 lakh (interest +principal). If the property is owned in joint names and loan taken accordingly, then each of the co-owners can claim a deduction for housing loan interest up to Rs. 2 lakhs each and principal repayment u/s 80C up to Rs 1.5 lakhs each. So, loan taken jointly with your family can help you claim larger tax benefit. If you have availed for this, you both will loose out on the tax benefit aspect. You need to mutually discuss and come to the conclusion on the same.
Don’t forget the opportunity cost
|Home Loan Amount & EMI
||Rs 1 Crore
|Rate of Interest
|EMI for 20 years
|Total payment in 25 years
||Value after 25 years
If you are in receipt of surplus money, why to pay off an existing debt, and loose out on the money’s potential to earn more money? Not only will your hands be tighter once you give away the surplus money but also loose out on the income from investing it. You will be able to recover your EMIs by investing the surplus money instead of paying off the loan in the same time frame.
Don’t you agree? Check this out:
Ideally, you should look at creating long term wealth from your surplus money, instead of looking to pay off the home loan in haste. However, assess your situation before taking the final call.
A Well thought out plan
Let your family or friends say what they have to. Ultimately, it is your call. Being debt free or earning more on the surplus money, what would give you more solace? Further, how secure is your current income, be it through your job or business? In case of a sudden loss of income, are your savings sufficient to cover your loan payments. Think about these aspects when planning to repay your loan.