Home Loan : To Prepay or Not to Prepay ?

There are a lot of Articles written on the Topic of Home Loan prepayment or Invest on various blogs, however still this is one of the most common Question asked in Personal Finance Forums.

Let us try to simplify the same from our end with the following example.

Abhishek buys a House by taking a Loan of Rs. 40 Lacs, the Interest rate payable is 8.5 % pa, the tenure is 20 years.

In this case the EMI works out to Rs. 34,713 so Total payment is Rs. 34,713 X 240 = Rs. 83,31,120

So if Abhishek services the Loan for full Tenure of 20 years he is paying an Interest of Rs. 43,31,120.

lets Assume somehow Abhishek gets Rs. 40 Lacs, and now wants a solution – to close the loan and save the interest or invest the money and service the loan for full tenure.

What do you think ? What should Abhishek do ?

If he pays off the loan he is able to save Rs. 43,31,120
If he invests this Amount and is able to earn a return of 4 % he will be able to earn Rs. 47,64,493 in 20 years
If he invests this Amount and is able to earn a return of 6 % he will be able to earn Rs. 88,28,542 in 20 years
If he invests this Amount and is able to earn a return of 8 % he will be able to earn Rs. 1,46,43,829 in 20 years
If he invests this Amount and is able to earn a return of 10 % he will be able to earn Rs. 2,29,10,000 in 20 years
So on the basis of the above calculations you can decide what you need to do.

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