Indian consumers are very touchy about a loan, especially long-term debt. In spite of the fact that in the last couple of years tax advantages associated with housing loan have increased, many borrowers rush in to pay up their loan amounts before maturity and write off debts. And we all know that housing loans are typically long term in nature.
Does it make sense?
Not in the present environment when interest rates on housing loan are at an all-time low and there are significant tax benefits to housing loan seekers. In fact, it makes better sense to carry debt in general and a housing loan in particular. If you look at your repayment schedule and chose the loan amount carefully, you can save a neat sum through tax rebates. You also get the benefit of inflation over the term of the loan, as money gets cheaper by the year. Tax benefit together with inflation brings down the effective interest rate you pay, considerably. You really have a good deal going.
This doesn’t mean that you should not pre-pay your debt. There is a time when you should think of prepaying your loan but time your pre-payment wisely.
Lets take an example to make it clear.
On a 15-year loan of Rs 12,00,000 at 12.5%, the annual repayment for the loan would be Rs 180,917. It would make sense to pay off all the outstandings after the tenth year. By this time you have already availed 80% of the total tax benefit (Rs 523,205 ) that you could avail over the term of the loan. The table below indicates the tax saving every year.
Tax saving over the term of the loan
| Years |
Interest
(Rs) |
Principal
(Rs) |
Total tax
savings (Rs) |
| 1 |
45,900 |
4,000 |
49,900 |
| 2 |
44,717 |
4,000 |
48,717 |
| 3 |
43,387 |
4,000 |
47,387 |
| 4 |
41,890 |
4,000 |
45,890 |
| 5 |
40,207 |
4,000 |
44,207 |
| 6 |
38,312 |
4,000 |
42,312 |
| 7 |
36,181 |
4,000 |
40,181 |
| 8 |
33,784 |
4,000 |
37,784 |
| 9 |
31,087 |
4,000 |
35,087 |
| 10 |
28,053 |
4,000 |
32,053 |
| 11 |
24,639 |
4,000 |
28,639 |
| 12 |
20,799 |
4,000 |
24,799 |
| 13 |
16,479 |
4,000 |
20,479 |
| 14 |
11,619 |
4,000 |
15,619 |
| 15 |
6,151 |
4,000 |
10,151 |
| Total |
463,207 |
60,000 |
523,205 |
It is clear from the table above that the amount you save on account of tax from 11th to 15th year is only Rs 99,688, which is less than the tax benefits you would get otherwise. And the amount you have to repay would be Rs 644,166 only. This would not be too much of a strain. So, don’t rush in to pay off your housing loan (long-term debt) and when you decide to pre pay time it carefully.
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