Should I sell 60 lakhs in MFs to buy a house or take a home loan for 1.3 Crores?

Published: December 15, 2021 at 7:00 am

A reader who prefers anonymity asks, “I am planning to buy a house in the next few months. I have narrowed down on the property and locked in a price with the seller. I am using the proceeds of the sale of a property which was owned by my mother”.

“I have to arrange around Rs. 1.3 crores for completion of the sale. My wife and I are both working professionals, and our combined monthly income after taxes is around 3.2 lakhs. Together, we invest around Rs. 1.4 lakhs in MFs through SIPs. We live in rented accommodation for which the rent is Rs. 50,000. We have one nine-year-old child and would like to send him abroad for education. We have savings of around 70 lakhs in mutual funds and stocks”.

“My questions are as follows:
Option 1. Should I take a home loan of 1.3 crores with a 20-25 years tenure to finance the remainder of the requirement? OR
Option 2. Should I liquidate most of my savings (say 60 lakhs) and take a loan of 70 lakhs for a tenure of 15-17 years”.

I am getting differing advice regarding my questions. I understand that if I liquidate my Mutual fund savings, I will lose the compounding effect. But I will end up paying less interest on the home loan. I would be grateful if you could advise me on my conundrum”.

Warning and disclaimer: Our responses to reader questions are generic and is based only on the message received. There may be other factors that need consideration to appreciate the full context of the question and provide holistic advice.  This is beyond our capability. We recommend readers consult a SEBI registered fee-only financial planner from our list for professional advice.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    Currently, the reader is investing more than 40% of total monthly income in mutual funds. Suppose they take a joint home loan for Rs. 1.3 Crores at an interest rate of 10% (to err on the side of caution and account for possible rate hikes) for 20 years, the monthly EMI will be about Rs. 1.25 lakhs.

    Currently, for a normal home loan*, the EMI will be just above Rs. 1 lakh or about 30% of the total income – a comfortable level. See: When should I get a home loan? How do we decide this? Accounting for an increase in income in the coming years, even if the rate increases to 10%, the EMI will not cross 40% of the total income.

    * We recommend a normal home loan instead of an overdraft home loan (like Max Gain). Just like insurance and investment should not be mixed, we see no reason why a mortgage and investment/savings should be mixed, plus the EMI will be lower. The time value of the extra EMI paid in the case of an overdraft account will diminish its “benefits”.

    The key assumption here is that the new property is for self-occupation. Meaning, at current interest rate levels, about half of the EMI paid will come from the rent that no longer needs to be paid.

    This means the monthly savings will reduce from Rs. 1.4 lakhs to about Rs. 85-90K. So still, about 25% of the total income will be invested, and it is not bad at all. If necessary, a small reduction in discretionary spending will also help.

    The first option, “take a home loan of 1.3 crores with a 20-25 years tenure to finance the remainder of the requirement”, is just about possible. If, however, the EMI outgo seems too much or if the reduction in investment is hard to stomach, we recommend reducing the loan amount by a little (say 1 Cr or 1.1 Cr) using existing investments.

    We do not recommend redeeming as much as Rs. 60 lakhs (second option)  from existing MF investments. This would mean taking a loan for Rs. 70 lakhs, and the EMI will replace the rent with only a small extra outgo. However, most of the net worth will also be eaten up in the property purchase. This may impact their goal of sending their child abroad. Since he is already nine years old, there may not be enough time to rebuild a corpus.

    A strong emergency fund and adequate health insurance are key to this plan. So we recommend putting this in place as soon as possible. 

    Implications: There are also downsides to any decision. Such a large home loan would require some time to get used to wrt monthly investments and expenses. More importantly, it means there is no chance of both partners retiring for the next 25 years. Even then, the retirement corpus will heavily depend on future income (assuming a good chunk of the present net worth is spent on the child).

    This means want-based lifestyle changes in future will have to be sacrificed for some years to come.  Thus there are risks here that are unpleasant to think about (e.g. our health may prevent us from working and increase recurring expenses). However, we recommend that the couple consider these before taking a plunge. These downsides are present in both options.

    In summary, the couple should consider their long-term goals, future employability and growth in income before finalising the real estate purchase. We recommend that they consult a SEBI registered fee-only financial planner, get a retirement plan chalked out and then decide the home loan amount.

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)