By Vipin Agnihotri
There is quite a rush among Indians to repay the home loans in view of the increasing interest rates. But the question now arises: Is it the right move? The India Street decided to analyze the whole situation.
In the last one-year, interest rates on home loan have increase substantially. In terms of statistic, the rates have gone up from around 7.5 percent in 2005 to 9 percent in 2006 and further to around 12 percent at present. In my opinion, this has led to rise in the equated monthly installment in the last one-year by around 23 percent and by 37 percent since 2005.
It has come into the notice of The India Street that as the interest rates on home loan has increased; plenty of borrowers are considering pre-paying the loan from their savings. But if experts are to be believed, one should just not rush to withdraw for his savings like provident fund to pre-pay a part of the home loan.
In my opinion, first and foremost you should try to find out the net cost of your home loan after adjusting for tax advantage. Once you are through this step, you should ascertain the return your savings are generating. Theoretically speaking, if the net rate of return of your saving is higher than the net cost of your home loan, you need not retire the loan by dipping in such saving.
On the other side of the coin, if the return from a particular investment of yours is lower than the net cost of home loan, it is recommended that you pre-pay the home loan from such savings. It is worth mentioning in this regard that there is no penalty for pre-paying of your home loan from your savings.
In terms of tax benefit, first you should ascertain the tax benefit that you get because of repayment of the home loan. If you take into account Section 24 of the Income Tax Act, you will realize that you are subjected to a deduction of up to Rs 1,50,000 from your taxable income against the interest payment for your home loan. Similarly, according to Section 80C, your taxable income will get minimized by the principal up to Rs 1 lakh repaid during a year.
All in all, if you have money lying idle in the savings account, where you are earning a return of 3.5 percent you should prepay the home loan from your such savings.
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· Waiting for Interest Rates to fall not a Good Strategy · Visit our India Resource Page · The Latest India Real Estate Round Up |
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