Is Housing Loan Prepayment is a Good Option? Find out...

I have the opinion backed up by data that our housing loan EMI should not prepay and close before the tenure. 

Reasons are

1. Housing Loan is the long term loan and the interests are peanuts.

2. One house is enough for the individual and if they close the loan early then the chances of getting into another loan is very high.

Many Individual try to pre-close the EMI in 5 to 7 years and feel that they are saving good amount of  money not paying to Housing Loan Companies. I have input the data and how it works in a long term!

First of all, it is highly difficult to close it in 5 years, so I took 7 years for argument sake.

I have taken 50L housing loan and the EMI would be 49,919, at the rate of 10.5% and 20 years will be the term.

At the end of every year for the next 5 years, the individual is prepaying 5 Lakhs which itself is not an easy thing to do. In the 6th and 7th Year, it will be 8 Lakhs and beginning of the 8th year whatever 3.68 Lakhs which is left also be paid.

The difference in the EMI will be invested in PPF at the rate of 8.7% as suggested by her.

In other words, the individual is paying 49,919 for the next 20 years and keep reducing the housing loan and keep increasing the PPF. In addition to that from the 2nd year onwards, till 8th year he paid pre-payment around 44,68,926 and generating close to 2 Crore. Instead of prepaying if the same money is invested in a diversified mutual fund, I assumed two scenarios 1. 12% and 2. 15%

Months	EMI	Installments	Interest Paid	Pre Payment	PPF	ROI	Years	Value	No Prepayment		Future Value
1--12	49919	12	599028						Intest Assumption		Intest Assumption
13-24	44479	12	533748	500000	5440	8.70%	19	3,167,927	12.00%	15.00%	INR 4,306,381	INR 7,115,886
25--36	39547	12	474564	500000	4932	8.70%	18	2,576,717	12.00%	15.00%	INR 3,844,983	INR 6,187,727
37--48	34211	12	410532	500000	5336	8.70%	17	2,494,745	12.00%	15.00%	INR 3,433,020	INR 5,380,632
49--60	28756	12	345072	500000	5455	8.70%	16	2,275,680	12.00%	15.00%	INR 3,065,197	INR 4,678,810
61-72	23163	12	277956	500000	5593	8.70%	16	2,333,250	12.00%	15.00%	INR 3,065,197	INR 4,678,810
73-84	13994	12	167928	800000	9169	8.70%	14	3,013,439	12.00%	15.00%	INR 3,909,690	INR 5,660,565
85-96	4532	12	54384	800000	9462	8.70%	13	2,742,362	12.00%	15.00%	INR 3,490,794	INR 4,922,230
			2863212	368926	4532	8.70%	13	1,313,505	12.00%	15.00%	INR 1,609,806	INR 2,269,923
				4468926	49919			19,917,626			INR 26,725,068	INR 40,894,584
Total Amount Paid				7332138							INR 6,807,442	INR 20,976,957
											Sixty Eight Lakhs	Two Crore 10 Lakhs

When the broad-base index itself delivered 17% CAGR for the past 34 years and if you add 1.5% as dividend yield, the very conservative return from the fund in the next 20 years would be 15%.

@12%, he will gain 68 Lakhs additional

@15%, he will gain 2.1 Crore additional

I think, I have not overlooked anything, in case if I have missed out anything, please inform me and I will revisit again.

Conclusion: To me, housing loan should continue till the tenure irrespective of the interest rate, which I keep telling for the past 3 years and I stand by this.