I am 52. I have a home loan balance of Rs 18 lakh payable over the next 7 years and an education loan of Rs 45 lakh for which the EMI has not started but I am paying an interest of Rs 35,000 per month. I have a Jeevan Saral policy with current surrender value of approximately Rs 25 lakh, which I can continue for another 13 years. I pay a premium of Rs 36,000 every quarter for this policy. Apart from this, I have another term insurance policy of Rs 2 crore. I can work for another 8 years before I retire. My question is, should I surrender the insurance policy to partially pay off the education loan or should I choose the EMI way for next 8 years? If your advise is to close the insurance, where should I invest the saving from interest and EMI?
Raj Khosla, Founder and Managing Director, MyMoneyMantra.com replies: You should not touch your insurance plan for prepaying loans. Surrendering Jeevan Saral Policy will entail loss of retirement corpus as well as accrued benefit of value appreciation on maturity. To keep your current cash flows manageable, ensure that your monthly fixed obligations such as home loan EMI, education loan EMI and insurance premiums are less than 50% of take-home income. To reduce the burden of monthly liabilities, it is rather recommended to opt for a loan against insurance policy at an interest rate lower than education loan. You can borrow up to 80% of the current surrender value and the amount will be adjusted at maturity. The maturity amount will continue to appreciate according to the policy document. Use the loan amount to prepay education loan and save the interest cost. The interest saving should be invested into two or three large-cap mutual fund SIPs for at least 5-7 years. Continue serving home loan and adjusted education loan EMIs basis the respective loan schedules. Thus, you will also tap the tax benefits on both loan accounts. After 5-6 years, further prepay education loan with the mutual fund corpus. The tax benefit on the student loan is available for 8 years and you will be in good position to close your child’s account within stipulated time frame. Thus, eventually, you will save your retirement corpus, minimise interest cost and tap the available tax benefits all along.
I need to spend around Rs 20 lakh on home renovation. I am not sure about taking a personal loan. But I don’t want to touch my savings either. I have Rs 5 lakh kept aside in mutual funds for home improvement, but Rs 20 lakh would mean dipping into my mutual fund investments earmarked for retirement. What should I do?
Raj Khosla Founder and Managing Director, MyMoneyMantra.com replies: Banks are currently offering decadal low rates of interest for loans. You should thus opt for a bank loan and refrain from touching your mutual fund investments and retirement kitty. Stay invested and build a larger corpus for the long term. Personal loans are ideal for urgent cash requirements for 3-5 years. The loan can be approved the same day with minimal documentation. Currently, personal loan interest rates vary from 10.25% to 18% at a reducing balance, basis the borrower’s income and repayment capacity. Consider opting for a secured loan such as loan against property. The rate of interest for LAP will start from 7.5% for up to 15-20 years. The EMI will be more affordable. Also, you will get more flexibility to prepay the loan in fewer years, according to your cash flows. Do compare different bank deals for factors such as interest rate, post disbursal services, processing fee, penal charges, prepayment flexibility & foreclosure charges before finalizing options.