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How to reduce the Home Loan EMI and invest in Mutual Funds through SIP

I have an ongoing home loan from, HDFC bank. Details are as follows: Home loan amount - 49 lakhs, Insurance of loan - 1.5 lakhs, Start date - March 2012, Initial EMI was - 51,000, Current Rate of interest - 10.8%, Current outstanding - 46 Lakhs, Current balance EMI - 144, Special situation - I had asked bank to increase my EMI from 51k to 58k in sep 2012, so as to pay faster. Query 1 - After discussion with bank if I want to reduce my ROI to 9.9%, I need to pay minimum of Rs. 5700+500. After which, with my current EMI of 58K, the balance EMIs will go down to 130. Shall I opt for it? Because if ROI by RBI goes down further, I will again be asked to pay conversion fees to bank. Query 2 - Should I reduce my EMI back to Rs. 52k, in that case my balance EMIs will go to 163. I am planning to invest this additional 6K per month in mutual fund, is this a good idea?

Aug 4, 2015 by Sudhir, Indore  |   Financial Planning

Query 1: HDFC charges 0.5% conversion fee (plus tax) on the outstanding principal balance to move to the current adjustable rate of interest. The current adjustable rate offered by HDFC is 9.9%, has been in effect from April 2015. There is an RBI Monetary Policy meeting tomorrow (Aug 4). So one needs to wait for the RBI Governor’s announcements. Most market experts do not expect RBI to reduce rates in 2015. However, they expect RBI to start reducing rates from January of 2016 onwards. If you get an interest rate lower than 9.9% within the next six months, then waiting for a lower rate makes more sense. While the interest payment at your current rate of 10.8% will be higher by about Rs 20,000 over the next 6 months than your interest payment at 9.9%, the savings in conversion fees (about Rs 25,000) will more than offset the higher interest payment. On the other hand if HDFC does not change the current adjustable rate for a long period of time, then it makes sense to opt for the lower rate now, because savings in the lower interest rate will more than offset the higher interest payment. Having said that, as discussed earlier, a rate cut in Q1 of calendar year 2016 is what most market experts are expecting at this point. The RBI Governor’s outlook on interest rates may provide further insights into the timing of the next rate cut.

Query 2: Your current EMI is Rs 58,000 and the balance tenure is 144 months. Assuming no prepayment, your total outgo over balance tenure will be Rs 83,52,000. If you reduce your EMI to Rs 52,000 and increase your balance tenure to 163 months, your total outgo over the balance tenure will be Rs 84,76,000, an increase in Rs 124,000 over your current projected outgo. So the question is will the Rs 6,000 savings in EMI, reinvested in mutual funds generate enough return to offset the your increased outgo on your loan? If you invest Rs 6,000 through monthly systematic investment plan in a diversified equity mutual fund over a period of 12 years (which is the current balance tenure of your home loan), then at 15% rate of return you will generate a corpus of Rs 24 lacs. This is will more than offset your additional outgo on your home loan. Please note that historically good diversified equity funds have generated more than 15% over a 10 year time horizon. However, since mutual funds are market linked instruments you will have to contend with volatility in the interim period. If you want lower volatility, then you can opt for hybrid funds which invest in both debt and equity. Even these funds can potentially give enough returns to make this option offset your additional interest outgo. You should consult with your financial advisor and make a considered decision.

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