I am 52 years old. I have a home loan balance of Rs 18 lakh due over the next 7 years and a education loan 45 lakhs for which EMI Haven’t started but I am paying interest of Rs 35,000 per month. i have one Jeevan Saral Policy with present surrender value of approx Rs.25 lakh, which I can continue for next 13 years. I pay a premium of Rs 36,000 every quarter for this policy. Also I have another term insurance policy 2 crores Rs. I can work for 8 more years before retiring. My question is, should I surrender the insurance policy to make partial payment of the education loan or should I opt for EMI route for the next 8 years? If your advice is to discontinue insurance, where should I invest the interest and EMI savings?
Raj Khosla, Founder and Managing Director of MyMoneyMantra.com replied: You should not touch your insurance plan to prepay loans. Surrendering the Jeevan Saral policy will result in accrued benefit of loss of retirement corpus as well as value addition on maturity. To keep your current cash flow manageable, ensure that your monthly fixed liabilities such as home loan EMIs, education loan EMIs and insurance premiums are less than 50% of the take-home income. To reduce the burden of monthly liabilities, it is recommended to take a loan against an insurance policy at a lower interest rate as compared to an education loan. You can borrow up to 80% of the current surrender value and the amount will be adjusted on maturity. The maturity amount will continue to appreciate as per the policy document. Use the loan amount to prepay the education loan and save on interest cost. The interest savings should be invested in two or three large-cap mutual fund SIPs for at least 5-7 years. Continue to pay Home Loan and Adjusted Education Loan EMIs based on the respective loan schedule. Thus, you will also tap tax benefits on both loan accounts. After 5-6 years, pay off further education loan with mutual fund corpus. The tax benefit on student loans is available for 8 years and you will be in a good position to close your child’s account within the stipulated time frame. Thus, in the end, you will save your retirement corpus, reduce interest costs and take full advantage of the tax benefits available.
I have to spend around 20 lakhs on this 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 set aside for home improvement in mutual funds, 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 of MyMoneyMantra.com replied: Banks are currently offering decadal low interest rates for loans. Thus you should opt for bank loans and avoid touching your mutual fund investments and retirement kitty. Stay invested and build a large corpus for the long term. personal loan Ideal for immediate cash requirements for 3-5 years. The loan can be sanctioned on the same day with minimal documentation. Currently, personal loan interest rates vary from 10.25% to 18% on a declining balance, depending on the borrower’s income and repayment capacity. Consider an option of a secured loan such as a loan against property. The interest rate for LAP will start from 7.5% to 15-20 years. EMI will be cheaper. Also, you will get more flexibility to prepay the loan in fewer years as per your cash flow. Compare various bank deals for factors such as interest rate, post disbursal services, processing fees, penalty charges, prepayment flexibility and foreclosure charges before finalizing options.