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I'm 42 years old and working in a private company. I've availed home loan from LIC on floating interest right now it is 12%. My total loan tenure is 19 years and loan amount is 24lack & EMI is 28098. Most of the banks reduced their rate of interest but LIC is not yet done. In this situation when I approached LIC for pre closure of my loan through other banks take over system they told me that if you close the loan before the stipulated time with your own source of income with necessary proof you won't get pre closure charge if you go for other banks take over you have to pay 2% on loan outstanding as a pre closure charge is it true? Is it advisable to change to other banks or continue with LIC? As of now I've 10000 as surplus money to invest my question is whether I include this in my home loan EMI or invest in any SIP for 3 to 5 years and use it to pay the loan as part payment. Which one is best still I've to pay 22lack. As a first time investor which one is best for me with respect to my condition?

Sep 18, 2015 by V.G. Chandrasekaran, Coimbatore  |   Financial Advisory

Unfortunately in India there is a cost associated with refinancing your home loan. You have to pay a pre-payment penalty if you are getting your home loan refinanced by another bank instead of pre-paying from your own savings. Refinancing your home loan makes sense if the new home loan interest rate is lower than your existing home loan interest rate by at least 1%. Your current home loan interest rate is 12%. In the current environment you may get banks to give you a loan at around 10% interest rate. If you get a 10% interest rate you will offset the pre-payment penalty with the savings in your home loan interest cost in the next one year itself and save money in the long term. There is an RBI monetary policy meeting coming up in the next 2 weeks. If RBI cuts repo rates in September policy meeting, as is expected, the banks may reduce home loan interest rate further. Therefore, if you are ready to wait for a few weeks, you may get even better interest rates and save more money. One thing to note about refinancing is that, it is like a new home loan on the balance loan amount (Rs 22 lacs in your case). Therefore, in your refinancing calculations you should also factor in the loan processing cost by the new bank. If the loan processing cost by the new bank is high, then it makes the refinancing option less attractive. However, you can try to negotiate a low loan processing cost with the new bank.

Once you refinance your loan you have two options. One is to continue with your existing EMI in the refinanced loan and reduce the balance tenure of your loan. If you continue with your existing EMI in your refinanced loan, assuming you get a 10% interest loan, you can reduce your balance tenure to 12 – 13 years. The other option is to reduce your EMI and continue with the same tenure. It is your choice, depending on your financial condition and your long term financial goals. Since you have Rs 10,000 excess cash-flows you can either increase your home loan EMI and reduce the tenure further, or you can invest through a systematic investment plan (SIP) in a mutual fund to accumulate a corpus for pre-payment of your home loan. The decision would depend on the outlook on returns from the SIP of a mutual fund versus the home loan interest rate. If the returns from SIP of the mutual fund will be higher than your home loan interest rate, then common sense logic tells us that investing through SIP in mutual funds makes more sense. If it is the other way, then you should increase you home loan EMI amounts. No one can predict the future, so we have to go with historical data here. In the last 3 to 5 years, compounded annual SIP returns of top performing diversified equity mutual funds have been 20 – 25%. If you increase your EMI by Rs 10,000 in your refinanced home loan, assuming an interest rate of 10%, you will be able to save Rs 7.6 lacs in interest cost over the next 5 years and your outstanding loan balance will be that much lower. If you invest Rs 10,000 through monthly SIP in diversified mutual funds, assuming you get a 15% return, you will be able to accumulate Rs 8.9 lacs towards your home loan pre-payment in the next 5 years. If you get a 20% return from your mutual fund SIP, you will be able to accumulate Rs 10.2 lacs towards your home loan pre-payment in the next 5 years. Mutual funds are subject to market risks and as such you have to take a well considered decision, depending on your risk tolerance.

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