Home loan EMIs set to rise, but don’t rush for pre­pay­ment

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - Ash­wini Ku­mar Sharma and Shaikh Zoaib Saleem ash­wini.s@htlive.com

NEW DELHI/MUM­BAI: Wor­ried about up­com­ing RBI rate hikes and plan­ning to pre­pay your home loan? Think again: home loan EMIs come with tax breaks, and you could, in fact, save some money by keep­ing a home loan alive.

If you are pay­ing a home loan rate of 9% with a re­main­ing ten­ure of 10 years, it makes fi­nan­cial sense to keep a ₹ 23 lakh of loan alive.

Vishal Dhawan, founder and chief ex­ec­u­tive of­fi­cer, Plan Ahead Wealth Ad­vi­sors, said that if a home loan bor­rower has sur­plus liq­uid­ity and she is fairly sure that it is not needed for any other fi­nan­cial goal, then it is a good idea to re­pay, par­tially or fully.

“For peo­ple who do not have the sur­plus liq­uid­ity, they need to en­sure that they keep their ten­ure in­tact by in­creas­ing their EMIs, rather than al­low­ing the ten­ure to go up, and there­fore end­ing up pay­ing more in­ter­est,” he said.

You know that you are el­i­gi­ble for a de­duc­tion of ₹ 2 lakh un­der sec­tion 24(b) of the In­come Tax Act, 1961, from your tax­able in­come for the in­ter­est you pay on your home loan. The idea is to keep the loan amount at a num­ber that gives you an in­ter­est cost of ₹ 2 lakh a year to milk the tax break fully.

For ex­am­ple, if your home loan rate is 9% and the re­main­ing ten­ure is 10 years, then a home loan amount of ₹ 23 lakh will give an in­ter­est cost of ₹ 2 lakh. At 9.50%, the op­ti­mal loan amount is ₹ 21.75 lakh. The higher the in­ter­est rate, the less loan you should keep.

The lower the rate, the higher the loan amount you can keep. As in­ter­est rates are ris­ing, the amount of loan to keep goes down.

What’s the math? When you get a tax break on your home loan in­ter­est, the ef­fec­tive cost of the loan goes down. If you are in the high­est tax bracket of 31.2%, a 9% loan will cost just 6.2% if your loan amount is ₹ 23 lakh.

Sup­pose your large-cap eq­uity fund is giv­ing you an an­nual re­turn of 10%, then it makes sense to keep the money in the fund and pay an in­ter­est of 6.2%, rather than break the in­vest­ment and pre­pay your loan. You can pre­pay the amount in ex­cess of your ideal home loan amount.

Most home loan prod­ucts are al­ready more ex­pen­sive post the pre­vi­ous rate hike by the Re­serve Bank of In­dia. Ex­pect an­other round of rate hikes on your home loan soon. But re­mem­ber to not rush in to pre­pay

MINT/FILE

Most home loan prod­ucts are al­ready more ex­pen­sive

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