Last week I had posted a calculator to figure out which is better:
(a). Pay off your home loan asap and then step up retirement investment
(b). Let the home loan run its natural course and invest as much as possible for retirement.
I now post a revised version of this calculator with the following features:
1. Subra(money.com) mentioned an interesting possibility: If the outstanding loan balance falls below a certain amount then a lower interest rate may be applicable. A lump sum payment to the lender can make this possible.
For example (assuming my understanding is correct): Let us assume that the rate applicable for amounts above Rs. 30 lakhs is 11% and 10.5% below. Suppose my loan balance is Rs. 34 lakhs and I pay a lump sum of Rs. 5 lakhs (if possible!) to the lender. The the balance drops to 29 lakhs. I then ask the lender to lower the rate to 10.5%. If I keep the EMI amount the same then the principal component increases considerably. The loan tenure will then decrease.
This possibility has been incorporated in the calculator.
2. Ms. Tinkerbells who has provided valuable feedback on several calculators pointed out a confusing aspect of the lump sum payment in the earlier version. This also has been corrected.
What should one do? Pay off home loan or invest for retirement?
If you wish to retire by 40-45 (implying you are likely to spend a good 40 years in retirement!) then and only then it makes sense to close out your home loan asap and then invest for retirement.
If you intend to retire by 60 (20-25 years in retirement) then to ensure financial independence during retirement you will need to invest as soon as possible and as much as possible and let the home loan run its natural course.
People talk about ’emotional’, ‘psychological’ and ‘parental’ (as Subra points out) pressures to close the home loan asap. If you give in to such forces it is quite possible that you may not be financially independent during retirement.