Use this calculator to analyze if you should pre-pay your home loan asap or invest instead. This is now republished after correcting a bug pointed out by Ankush.
I had posted an illustration of prepay vs invest in June but did not post the associated sheet. I have now modified the sheet to include new tax rules. Future changes in rules can also be easily accommodated with user entry.
The money that is free for investments (inevstible surplus) is assumed to grow at some interest rate (can be modified). Whenever there is a need, withdrawals are made from the corpus. This will work best if you use only long-term goals.
1) Details about your home loan and the lump sum you have. An amortization table will be created. Will post the amortization sheet separately.
2) Details about retirement and your other financial goals (preferably long-term, 7Y-plus)
The result would look something like this
Green line: This is how your investible surplus would have grown, had you not taken the loan.
The black dot represents the retirement corpus that you need (taking into account existing corpus)
Blue Line: Growth if you invest the lump sum (fully or partially)
Red line: Growth if you pre-paid the home loan with the lump sum (fully or partially)
The bumps in the lines represent withdrawals for different goals (coloured dots).
The sheet is rather complex. Therefore I request you to please play around with it and let me know if you spot anything funny.
My take: This is not an either-or question. Prep-pay in chunks without neglecting investments. Read more: Illustration: Pre-pay Home Loan or invest
Vinay: I will include your suggestions in the amortization sheet to be posted soon.
Noted: Updated with bug pointed out by Ankush. First published: Nov 13 2014.
Thanks to Mohit Pandey for pointing out an error in the section 24 limit cell.
Thanks to Naveen for pointing out an error in the retirement planner sheet.
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!