Updated: Pay off Home Loan or Invest For Retirement Calculator

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

or

(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.

Download the updated Pay off loan or invest calculator

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28 thoughts on “Updated: Pay off Home Loan or Invest For Retirement Calculator

  1. Jassi

    Hi Pattu,

    Does it make sense to purchase a cheaper property elsewhere (outskirts) and stay on rent in the area you like (in the city ), where
    property rates are costlier?
    Reasons are:
    1> one can pay the loan EMI easily at an early part of career.
    2> If there is any medical emergency, at-least there is own’s one house to which one can shift (emotional reason).

    Also, above consideration is if financial planning is done and retirement/goals SIPs are in place.

    I have already asked this query before in different forums, but just collecting more ideas.

    Rgds,
    Jassi

    1. pattu

      Jassi, I am not expert. This is what I will do:

      I will buy a house in an area where I intend to live out my life.

      If I can commute to work from this property then great. Buy it asap so that when the loan closes I can invest more towards my goals. Since Rental expense becomes zero the day I take possession it is one burden less even though the EMI will be typically higher than the rent.

      If I cannot commute to work from this property then I will have to ensure that rental income from this property is more than the EMI and hope for decent income increase down the line. Since the rental expense will persist I will have to move there once I retire.

      Curious to know what forums had to say about this.

      1. Jassi

        Thanks Pattu.
        Among all financial planning aspects, this is toughest and challenging, emotional and finances wise.....
        some suggest to buy a land, some suggest to wait for property rates to come down (which I dont see), some suggest to buy in outskirts but again see if rental values are good (which are not good in outskirts).

        My situation is this: Financial planning done, All retirement SIPs in place, Term and medical insurance bought. Also I have bought a land whose EMI will end in 2015.
        Now, post loan completion of land, should I invest more in real estate? If yes, in what kind of property -> land, a house or an apartment.

        The area where I am staying and want to stay till I work, is a very good one. But I can only buy a property here if I sacrifice my other goals and have a heavy EMI. So I am quite ok to stay on rent life long....

        But then, should I invest in another property in outskirts and rent the same --> Reason will be asset allocation and also the feeling that one can sell it and buy another one at retirement....

        or should one invest that money in equities, till we can afford for own consumption?

        Rgds,
        Jassi

        1. pattu

          If you have done your retirement planning taking your rental expense into account and invest enough towards then its fine to stay on rent life long. However this is highly undesirable as several factors are beyond ones control.

          I believe it is best to have one self-owned property to stay in and invest the rest in equity and simple debt instruments. Real estate can be used for a passive income generator only if you suddenly get a large sum of money from an inheritance etc. Other than that I am against real estate as an investment.

          Why not sell the land in 2015 and then use that to partially fund a house in the area you live? Perhaps even your current home if possible/desired? If you can fund 40-50% of the property price yourself then your EMI could be lower or comparable to your current rent. Which is pretty good.

  2. Vivek

    Hello sir
    I am 33 years and will retire in a year or two from army now - no bank bal, no support from family and no property as well. Got a wife and two small kids wat can I do for their future and my second ( hopefully ) retirement from civil job which I may get after 2-3 years.
    Thnx waiting in anticipation

    From Vivek

    1. pattu

      Dear Vivek, Thanks for writing in.
      First, I think you should focus on the kind of civil job you can get and plan to get it immediately after getting out of the army.
      Second, please build a bank balance from today. Ensure you have at least 6 months living expenses in your SB account right now.
      Ensure you have health insurance for your family (ignore Army benefits) and for yourself too if possible now itself.
      After you come out you will need life insurance.

      We will take it step by step.
      Focus on the civil job, bank balance and health insurance first.

  3. Mr P

    Dear Pattu

    I am a 46 year old professional. I have recently moved to a new, bigger flat and have put in all my investments into it. On top of it I also have a huge home loan.1.5 CR. 50% of my income goes into EMI. My old property is worth the same amount as the loan-1.5 Cr. I am in a dilemma whether to continue paying the heavy EMI and retain old property or sell of the old property and repay the loan. The old property has a redevelopment potential hence this dilemma. After buying the new flat i do not have any emergency fund, investments, security left.
    I am also advised to bear the pinch for a few years hoping that the old property would fetch better results and not to sell it off in a hurry. A bit confused at the moment. Any advise shall be welcome.

    Regards
    Pratik

    1. pattu

      I would suggest the following: Sell the old property immediately. From the proceeds, keep away a little as emergency fund and then invest it for your retirement in liquid instruments like mutual funds (equity +debt) and some portion in fds. You will have to bear the EMI burden. However each time you get a bonus, prepay the loan.

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