“People who find themselves with extra cash can face a dilemma. Should they use the money to pay off—or at least, substantially pay down—that pile of debt they’ve accumulated, or is it more advantageous to put the money to work in investments that will grow for the future? Either choice can make sense, depending on the circumstances.
In this video we have discussed, how to understand if we should prepay the loan or we should invest the excess amount in the asset class.
In this video we have also discussed which asset class we should invest in.
Additionally, we will try to understand how to compute the amount of money we are going to save.
So to understand how to effectively decide between prepaying debt or investing, stay tuned till the end of the video. ”
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What is covered?
00:00 – Start
00:30 – Introduction
02:12 – Things to consider before making decision of prepaying loan or investing
05:18 – Exception to the rule of prepaying fast or investing in market
06:53 – Numerical example to understand the amount of saving
16:15 – Conclusion
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#RachanaRanade #loanrepayment #investing
About the prepayment penalty short description with link
https://economictimes.indiatimes.com/wealth/personal-finance-news/rbi-restricts-banks-from-charging-prepayment-penalty-on-home-loans/articleshow/12711108.cms
According to the RBI rule, banks are not allowed to charge you prepayment penalties on home loans.
Can I use an opportunity like COVID, to invest in market and get a 50% return (minimum)? Anyways my loan is for 20 years and we know ki atleast one mega recessive event occurs per decade.
Just an illustration…
Very perfectly done. Thanks mam
Very well explained
Just want to mention – hope everyone is also considering the rent you save or gain from the purchase. The property valuation is also a point to consider, some properties may get a 2X valuation by 7 to 12 years from purchase.
What is not being factored into all of these options and calculations is Risk – Life comes at you in a thousand ways…always better to become Debt free at the earliest possible timeframe , and is one of quickest way to build wealth afterward provided you make wise investment decisions.
Hello Ma'am,
In option 2, following assumptions are made which may not be true over period of 15 years of time.
1. Assumption is investment in index fund
2. Rate of return on investment is 14% throughout 15 years.
Also following is not considered in calculations in option 1.
Persons investment after loan payout within 5_8 years also increases..that profit is missing in gain calculation in option 1
CA Rachana has illustrated the comparison based on "absolute interest". Impact of LTCG/STCG on investment returns was not considered in the discussion.
An alternate viewpoint is to take time value of money into account i.e. look at XIRR of combined EMI & SIP installments + tax saving every year + LTCG/STCG at the end.
Put all the projected cashflows of EMI, SIP, Tax Saving, LTCG etc. into a spread sheet and calculate the estimated XIRR. Think of the whole scheme of things as a "single investment product" with incoming and outgoing cashflows. If XIRR is negative, it's unlikely the scheme will be beneficial.
Assume Home Loan interest rate of 10% & SIP return rate of 12% to keep some margin of error, in case you go wrong on estimating interest rates.
If Equity and mutual funds yields better returns than loan closure, why do banks into loan business. They can directly invest in them. Subject to market risk😂
Hindi mein samjhaiye
But what about Home Loan Amortization?
What about LTCG on gains?
Loans, debt free means peace of mind… ❤
You have not considered the tax angle of the loan. In a home loan at 8% you get upto 2 lakhs interest waiver from your income tax slab, say a savings of 30%, which brings down the effective interest rate to 6%. So if one has any instrument giving 8% after tax, it is still worth it. An index fund could give an average of 10-11% after tax and may be a good option
I am a govt. employee. My 80 c is full with housing loan rebate, term plans. Can I show my employer deduction of nps in 80ccd ib.
Waste of resources.
Actually, being a CA, She should have also shown LTCG tax to be paid for 15 yrs investment and then shown the NET gain. she showed the tax saved with home loan interest though.
You did not include inflation in the video
10% tax on LTCG for gains made via MF has not been considered in your calculations right?
Madam pls overacting karna band Kar do. Bahut irritating lagta hai
Old video can't be followed now
Hi rachana… Sagal dokyavrun gelay….. Will I get excel sheets, for my calculation
Being a Ca aspirants
I have got what you want to say but I think 1 point is ignored in option 2
That the Capital Gain Tax😅
I am doing option 2 & I am loving it 💰💰💰💰💰💰💰
The challenge is cash flow.. Is there a guarantee that a good cash flow will continue for foreseeable future.. In that case, it's better to invest the money rather than paying debt.. But if there is risk to cash flow, priority should be given for loan payment.. Statistically last couple of centuries, most of the business busted due to debt which they were not able to serve during bad times..
In reality both repayment and investment are very close to each other, so no matter what you chhoose is not going to make much difference, what is important instead is you spend within your limits. If you feel your exapnses are extremely cut to cut its better to reduce them then, try to increase salary and then increase your expanses. Agar bunglow ka paisa hai yo bunglow me raho, 3 bhk ka hai to wo le lo , 2 bhk ka hai to wo lelo, 1 bhk ka hai to wo lelo, agar tum ekdum minimalistic life jite ho to ek 3 admi ki family 1rk me bhi reh legi, bada ghar ka fayda kya hota hai, rat bhar so, subah ofc sham ko do ghante tv/ghumna. Chahe koi bhi ghar ho jab karna yahi hai to dont overstress yourself.
Directly calculating the 30% tax savings on interest paid is not the ideal option because there is a 2 lakh maximum exception and most interest paid in a single year exceeds 2 lakhs. We do not receive the entire interest payment exemption. 15:25
To pay the additional 9 Lacs there's gonna be more interest paid on that too. The Option 2 would then decrease further.
What is over flow transfer in home loan account means and what to do by customer point of view..
Only in hindi videos in india
Actually we are paying the intrest in reducing rate of intrest
I would prefer loan repayment….
Jisko dekho apna course sale krne me lage h…🤣🤣🤣
Very good detailed video madam
Have you considered lumpsum payments in between ?
Also I think it’s about discipline
When you have to pay off loan you do that by emi and extra payments in between but if I prepay let’s say 5 lakhs every 6 months extra that knocks off loan principal amount
Also when you have prepaid loan you have house appreciation too for confirming total gain …
I think still not convinced prepaying is bad options
Option is stupid 11:58
Bande ki emi 43k to Dena hi hogi na bank ko
Only 10 k extra u can invest
Purpose of life is not only ..investment..investment…investment…enjoy the fun on life…one does not know…where in the corner death is waiting…so enjoy…enjoy..enjoy..
Maam often financial advisor do not include liable tax on capital gain.
If I follow correctly you also did not mentioned tax on the return amount (gain). Is it correct that tax on return is 10% regardless of my salary income or tax calculation will club together with the income at that time. Or finally is my understanding not correct?
Love your videos – always informative.
Mam You did not calculate that fear during the whole timespan. There are many uncertainties in life. I would choose to close the home loan in the first 5 years rather.
I am really impressed by your videos. I wish you become our future finance minister..
Nice video.I always believed in prepaying the loan as early as possible as interest paid to the bank or nbfc is a loss and often ends up paying almost double of the originally paid amount. Repayment of loan is a reality and it is a true fact. Returns projected is an imaginary situation and need not repeat. Sure shot investment options are always a loss to home loan interest rates. Value of money and inflation also need to be considered. Prepayment as early as possible give the full money to your hand which can be used to buy SIP or value invest in any stock without any fear. You need to have enough money to do bullet payments to close the loan early.
Eg you have taken 1 cr loan with interest rate of 8.6% for 20 years. You have very significant increase and do bullet payments as payment from your account and income doesn't attract penalty. This will decrease principal and interest. You can continue paying your same EMI. If you can close your loan account in 5-6 years, you have the full amount left to do SIP. Do it for 14-15 years. Profit will be much higher. Only part you loose is the housing loan interest tax savings which could be upto 4 lakhs if you have your spouse also in the loan., Still this option gives higher return overall.
Thanks for the insightful video! It shed light on the nitty-gritty of loan repayment vs. investment, including the often-overlooked factor of changes in home loan interest rates. Once again, Thank you, @CARachanaRanade Jee !
Mam missed about long term Tax of 10℅ on mutual fund return..that should be minus from gain
1. FD returns post taxes will be close to 4%
2. If NBFC is charging high interest then loan transfer or negotiating for lower interest rate are also some options