Pay off home loan or invest for retirement? Calculate and find out!

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Recently subra wrote an article on Payoff Mortgage or Invest…continued. Here is a calculator to fortify the argument

I have modified my financial freedom calculator to accommodate immediate lump sum investment to the lender to check if that option is better than investing the money for retirement (aka financial freedom)

The excel file explains the options available when you have a home loan and tells you which route is quicker (in terms of years to financial freedom):

1. Pay off home loan as quickly as possible with all the money you can spare (lump sum) and each month

2. Let the home loan run its natural course with EMIs alone while you invest all you can towards retirement.

Try out the calculator and let us know which do you think is better for:

(a) a person who wishes to retire early, say by age 45-50

(b) a person who wishes to retire normally (by age 60)

As usual suggestions to improve the calculator are always welcome.

Download the updated Pay off loan or invest calculator  (May 8th 2013)

Download the Pay off loan or invest calculator (April 30 2013)

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. hi sir,my question here is irrelevant but i dont know how to contact you,so i am asking here.just now i read hemant beniwal blog on term insurance and there i found lot of comments from’s almost two years old post.still you believe LIC is the best to take term insurance and you aversion to private insurance companies still continue? I am planning for a term insurance.your answer will be very helpful.if you can give your email id that will be great.Thank you

    1. This is a tricky issue. Personally I have a Amulya Jeevan from LIC. I got this when Aegon Religare was the only player. I did think about switching recently but gave it up. Personally I am not very comfortable with the online insurance model. I think the low premium is not just due to zero agent commission. I think the premium fixing model itself is different.
      That said if you choose an private player who is about 10 years old and are honest while applying you should be fine. Don’t delay the process. Do it asap

      1. Thank you sir .as of now I have sbi shield term insurance plan with sum insurance of 10l with 5% increase each year .I took it two years I want to take term insurance for 50l.

  2. Hi Pattu,
    A query regarding loan prepayment.

    For 10.7% rate of interest and 20 year loan term, the PRINCIPAL payment schedule is approximately as follows :
    1st quarter – ~10 years [9 years 11 months]
    2nd quarter – ~5 years [shade under 5 years to be exact]
    3rd and 4th quarter – last 5 years.

    Do you think it makes more sense to prepay if we are in the 1st quarter of payment schedule?

    1. Interesting question! One worth making a calculator. I made a quick check (kindly verify). Consider the following:
      Loan amt: 30L, rate 10.7%.

      Case 1. At the end of 9 yrs and 11 months the balance is 22L. Amt of EMI paid is 36L. If I close out the loan by paying a lumpsum of 22L. I spend: around 58L (ignore penalty)

      Case 2. Instead of the above, I choose to prepay in small chunks: say 1 L per year. Then by doing this for 11 yrs (from loan start) I can close out the loan in 12 years (as opposed to 9 yrs and 11 months). Total EMI paid is 41L +11L (prepayment chunks) is 52L.

      So by prepaying in small chunks I save 6L and I can close the loan after just 17 months compared to a single lump sum payment!

      So obviously case 2 is the way to 60

        1. Are you referring to the situation where the person had invested the part payments instead of using it pay off the loan?
          At the 9% the investment at the end of 10 year would be about 15L still short of 22L need for closure.

  3. I was referring to the figure of Rs 6 Lakhs which you have said is the net savings. But if the opportunity cost is taken into account will that figure still be true?

    1. Yes I see what you mean. The sum of 30K EMI over two years (the difference bet the two approaches) is more than the 6 lakhs.
      However the opportunity cost of the single payment made to preclose the loan also has to be considered. The the part payment is superior.

      1. There are two opportunity costs
        1) Rs1lakh being paid every year for 11 years. .. my guess is this should be 5-6 lakhs
        2) the opportunity cost of rs 30k emi for two years which would be rs 50k
        also to annul the effect of opportunity cost of rs 22L you could probably make the full payment at the end of 12 years
        think once you make calculations taking all this into consideration we will know the real extent to which scenario 2 is superior ..

        1. My previous reply:

          Yes I see what you mean. The sum of 30K EMI over two years (the difference bet the two approaches) is more than the 6 lakhs.
          However the opportunity cost of the single payment made to preclose the loan also has to be considered. The the part payment is superior.

          Answers this right?

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