Suggestions for Home Loan strategy

@Ramta_Jogi

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if you're comfortable with 10% cagr it's probably fine.12-14% happens in good times. Returns depends on where you invest too also no one knows the future

guest_999 wrote:

@Ramta_Jogi

First and foremost, take insurance for home loan cover.

Secondly, take term insurance out of that monthly 4K remaining from home loan.

As @noobDealer rightly said, you need to tone down your expectations from index fund to 9-10%. Going forward by 3 generations (30 years) we don't know how equity gains would be taxed (higher) & that would reduce your returns accordingly.

If i was you, I'd try to clear my home loan asap rather than try these stunts. All debt, i feel, is like a hanging sword on you n your family. Can't lose sleep over it.

Ramta_Jogi wrote:

First and foremost, take insurance for home loan cover.

Secondly, take term insurance out of that monthly 4K remaining from home loan.

As @noobDealer rightly said, you need to tone down your expectations from index fund to 9-10%. Going forward by 3 generations (30 years) we don't know how equity gains would be taxed (higher) & that would reduce your returns accordingly.

If i was you, I'd try to clear my home loan asap rather than try these stunts. All debt, i feel, is like a hanging sword on you n your family. Can't lose sleep over it.

Thanks for your points bro. Let me explain each of your points -> insurance, lower returns on index fund sip, debt trap. 
Coming to insurance, I have a term insurance for my loan balance which would cover my outstanding loan balance at any point of time. In addition, I have a term life policy of 1 crore up to 85 yrs of age. I also have sufficient medical cover for the whole family. I even have a property insurance. All these spends are outside the 25k budget and I have capacity to afford this. 

Coming to the returns on sip. Even if I get just 9% returns on index fund sip on 4k monthly for 30 yrs with 0.3% expense ratio and 10% ltcg tax, I will get around 60 lacs post-tax in return. Whereas, I would have effectively paid only 55 lacs for my home (25L principal + 50L interest - 20L tax benefits). So I am getting a home for effectively FREE and also 5L back (I know there will be some inflation). 

Next is debt trap. I don't want to close my loan early bcoz I don't want to fall in another debt trap. If I finish my loan in 10-15 yrs, I am sure my family would force me to buy another home which I don't want to happen. I want this 30 yr loan as an 'excuse' to prevent such scenarios (I am happy with just one home). Another reason is that this maximises my tax benefits. Let's say I finish my loan in 10 yrs. Then from yr 11 to 30, I might save 25k each month, but 30% of it eaten away by tax and I will forced to invest 1 or 2 lac every yr on elss, ppf etc. Also, wealth compounds much higher on 30 yrs sip than 15 yrs sip. 

Please go through it and let me know your thoughts. @Ramta_Jogi

RamSun97 wrote:
Thanks for your points bro. Let me explain each of your points -> insurance, lower returns on index fund sip, debt trap. 
Coming to insurance, I have a term insurance for my loan balance which would cover my outstanding loan balance at any point of time. In addition, I have a term life policy of 1 crore up to 85 yrs of age. I also have sufficient medical cover for the whole family. I even have a property insurance. All these spends are outside the 25k budget and I have capacity to afford this. 

Coming to the returns on sip. Even if I get just 9% returns on index fund sip on 4k monthly for 30 yrs with 0.3% expense ratio and 10% ltcg tax, I will get around 60 lacs post-tax in return. Whereas, I would have effectively paid only 55 lacs for my home (25L principal + 50L interest - 20L tax benefits). So I am getting a home for effectively FREE and also 5L back (I know there will be some inflation). 

Next is debt trap. I don't want to close my loan early bcoz I don't want to fall in another debt trap. If I finish my loan in 10-15 yrs, I am sure my family would force me to buy another home which I don't want to happen. I want this 30 yr loan as an 'excuse' to prevent such scenarios (I am happy with just one home). Another reason is that this maximises my tax benefits. Let's say I finish my loan in 10 yrs. Then from yr 11 to 30, I might save 25k each month, but 30% of it eaten away by tax and I will forced to invest 1 or 2 lac every yr on elss, ppf etc. Also, wealth compounds much higher on 30 yrs sip than 15 yrs sip. 

Please go through it and let me know your thoughts. @Ramta_Jogi

Seems like you know it already but wasn't very clear from numbers you posted, you save tax on only interest payment and not principal. 
Also, looks like you have made up your mind already

noobDealer wrote:
Seems like you know it already but wasn't very clear from numbers you posted, you save tax on only interest payment and not principal. 
Also, looks like you have made up your mind already

yes, the 20L (approx) tax savings I've mentioned is only on the interest component. (60k per year multiplied for 30 yrs + cess). 

We can even claim tax benefits for the principal component via section 80C nah ? @noobDealer (Ofcourse, I know PF and life ins will eat most of the available 1.5L limit in section 80C and will be left with very small portion to claim tax benefits for principal). 

It's just my plan. Based on dimers thoughts and suggestions, I can alter it. But first I need to know what's wrong with this plan and what is the strategy used by other dimers to close home loan. 

A better comparison: You complete your loan in 15 years with 25K emi, then the next 15 years you do a 25K sip; This should beat down the returns of 30 years with 21K emi and 30 years with 4k sip and the home loan tax exemption benefit.
@guest_999 @Ramta_Jogi

Here assumption is index will give u 10% return.

Some countries (Japan & now hang sang) have absolute return of 0% in 15 years (although Time bias is there). Although it is less likely to happen for India, but there is no surety.

So consider this aspect also. Of course tax saving is advantage.

BlueFlash wrote:
A better comparison: You complete your loan in 15 years with 25K emi, then the next 15 years you do a 25K sip; This should beat down the returns of 30 years with 21K emi and 30 years with 4k sip and the home loan tax exemption benefit.
@guest_999 @Ramta_Jogi

Thanks for your idea. I considered this idea as well initially. 

If I close my loan in 15 years, then from year 15 to 30, I can invest only 16k sip per month not 25k, because of 30% tax (8k). This 8k can be minimized if I move to new tax regime, but still it won't be 25k fully, it will be little less. 

Lets assume, I close my loan in 15 yrs, from year 16 I move to new regime and I am left with 20k for sip each month (post-tax). SIP calculator says I can accumulate 69L after the 30th year. (20k sip for 15 yrs with 9% returns with 10% ltcg and 0.3% expense ratio).

Some points to note here: 
1. As I have already told, if I complete it in 15 yrs, chances are very likely that my family will force me for another home, which will spoil all my plans. 
2. This plan gives me 69L returns instead of the earlier 60L, so it is 9L extra. The important point here is, if I just extend my SIP tenure by 5 years from 30 to 35 yrs, then the returns of 4k SIP would jump from 60L to 97L. An increase of 37L for just extending it by 5 yrs, purely bcoz of compounding! This plan is very possible, bcoz 4k monthly is so small that even after the retirement I can continue this SIP for another 5 years to get 37L more returns. This is not possible with your 20k sip plan bcoz, I can't afford to make 20K monthly SIP after retirement. So I am risking this 9L to get 37L more, not a bad deal for me. 
3. Also, I believe that as age increases fear will increase which won't allow us to invest in equity rather go for safer options like FD, debt funds etc.. This shouldn't be the case with the 4k sip plan, bcoz it should be small portion of my salary at that time. 

Please let me know if you agree with these points. @BlueFlash

I too have somewhat similar situation. I have all sort of insurances covered . Till last I had same thought process as you but off late I realized that there is no substitute to "peace of mind". Living a debt free life is a privilege specially for middle/salary class people like me. I have SIPs too going on multiple MFs (Sips started before taking loan so not stopping them) . What I have decided to do is use any sort of bonus/additional income / arrears/ extra allowance which I receive I deploy that to pay off the debt. Earlier all these used to go in equity.

drjpatwa wrote:

Here assumption is index will give u 10% return.

Some countries (Japan & now hang sang) have absolute return of 0% in 15 years (although Time bias is there). Although it is less likely to happen for India, but there is no surety.

So consider this aspect also. Of course tax saving is advantage.

Thanks. I wasn't aware of this. 

I just want 9% returns for this plan to work. So index fund + NPS or voluntary contr to PF can be used right ? or any other less-risk path to get 9% returns in long-term ? @drjpatwa

CITYZEN007 wrote:
I too have somewhat similar situation. I have all sort of insurances covered . Till last I had same thought process as you but off late I realized that there is no substitute to "peace of mind". Living a debt free life is a privilege specially for middle/salary class people like me. I have SIPs too going on multiple MFs (Sips started before taking loan so not stopping them) . What I have decided to do is use any sort of bonus/additional income / arrears/ extra allowance which I receive I deploy that to pay off the debt. Earlier all these used to go in equity.

Thanks. 

I agree. The problem for me is that, I am not able to invest a fixed portion of my salary due to my lifestyle. So was trying to reduce the home loan emi and carve out a small SIP portion out of it, whose returns I could use for my post-retirement life. 

RamSun97 wrote:
yes, the 20L (approx) tax savings I've mentioned is only on the interest component. (60k per year multiplied for 30 yrs + cess). 

We can even claim tax benefits for the principal component via section 80C nah ? @noobDealer (Ofcourse, I know PF and life ins will eat most of the available 1.5L limit in section 80C and will be left with very small portion to claim tax benefits for principal). 

It's just my plan. Based on dimers thoughts and suggestions, I can alter it. But first I need to know what's wrong with this plan and what is the strategy used by other dimers to close home loan. 

if taking out loan and maximising benefit is what you want, I would suggest take out another loan for 4k emi and invest that for market return 😉

RamSun97 wrote:
Please go through it and let me know your thoughts.

Whatever suits you.

@RamSun97

Your whole idea of investment, insurance and loan hangs on such a lengthy duration of time.

With rapidly changing times, you will witness a generation not too far away where LTCG will be taxed at least 30%.

Most importantly, in near future, index funds return may not garner more than 5% p.a.

Believe it or not, at present, some developed countries are already showing 0% return.

Between 2046 and 2050, India may have become a developed country or on the verge of becoming one, so major investment, loan and economic scenarios will change drastically.

I strongly recommend to close your existing home loan(s) before 2040 by all means. 

agarsh wrote:

@RamSun97

Your whole idea of investment, insurance and loan hangs on such a lengthy duration of time.

With rapidly changing times, you will witness a generation not too far away where LTGP will be taxed at least 30%.

Most importantly, in near future, index fund SIP return may not garner more than 5% p.a.

Believe it or not, at present, some developed countries are already showing 0% return.

Between 2046 and 2050, India may have become a developed country or on the verge of becoming one, so major investment, loan and economic scenarios will change drastically.

I strongly recommend to close your existing home loan(s) before 2040 by all means. 

Got it bro, really appreciate your advice. 

agarsh wrote:

@RamSun97

Your whole idea of investment, insurance and loan hangs on such a lengthy duration of time.

With rapidly changing times, you will witness a generation not too far away where LTGP will be taxed at least 30%.

Most importantly, in near future, index fund SIP return may not garner more than 5% p.a.

Believe it or not, at present, some developed countries are already showing 0% return.

Between 2046 and 2050, India may have become a developed country or on the verge of becoming one, so major investment, loan and economic scenarios will change drastically.

I strongly recommend to close your existing home loan(s) before 2040 by all means. 

if that happens home loan would be much cheaper to service