Skip to main content
Scripbox Logo

Should I pay down my home mortgage or save for retirement?

What comes first - prepaying the home loan or saving for retirement? Paying down your home mortgage would make you debt-free earlier than usual. On the other hand, longer life span and falling interest rates require that you plan aggressively for retirement. There are no easy answers.

What comes first - prepaying the home loan or saving for retirement? Paying down your home mortgage would make you debt-free earlier than usual. On the other hand, longer life span and falling interest rates require that you plan aggressively for retirement. There are no easy answers.

As a thumb rule, keep paying down mortgage in the initial years. It straight-away reduces your loan outstanding - resulting in substantial saving in interest payments over the loan tenure. Repaying Rs 10,000 extra every month will save about Rs 12 lakh of interest, while your loan gets fully repaid in 10.8 years.

Leverage Tax Benefits

First of all, avail income tax benefits on home loans to the fullest. Interest paid on home loan qualifies for a tax deduction up to Rs 2 lakh in a financial year. If stamp value of your property is less than Rs 45 lakh, it increases to Rs 3.5 lakh. Moreover, principal payment (including stamp duty and registration fees) up to Rs 1.5 lakh qualifies for Sec 80 C benefits. By availing them, you could lower your effective rate of borrowing.

For instance, EMI on a Rs 50 lakh home loan for 15 years works out to Rs 48,944 at the rate of 8.4 percent. Over the loan tenure, you pay Rs 88.1 lakh (Rs 38.1 lakh as interest payments).

‘Amortization’ results in interest payments differing in each year (see table). For instance, in the first year, you pay Rs 4,13,405 as interest, while repaying only 3.5% of the principal (Rs 1,73,927). In the second year, interest payment falls to Rs 3,98,219, while that of principal increases to Rs 1,89,113 and so on.

                            @8.4% rate of interest per annum*

If you are sole property owner and in the highest tax bracket, keep paying down mortgages till interest payments in a year are above Rs 2 lakh. Paying interest up to Rs 2 lakh in a financial year saves taxes to the extent of Rs 62,400 (@31.2 percent). Also, your effective cost of borrowing falls to 5.8 percent per annum. Incrementally, however it doesn’t get you tax benefit for that year.

Early prizes

As a thumb rule, keep paying down mortgage in the initial years. It straight-away reduces your loan outstanding - resulting in substantial saving in interest payments over the loan tenure. Repaying Rs 10,000 extra every month will save about Rs 12 lakh of interest, while your loan gets fully repaid in 10.8 years.

Double-tip

Now, this whole equation changes, if a couple were co-owners of the property and were joint taking a loan. In this case, interest payment up to Rs 4 lakh can be claimed by them. Interestingly, their tax advantages peak out in the first year itself, as per the amortization table, and not in the tenth year.

Sunset Point

Don’t ignore your retirement goals. To give a comparison, Rs 10,000 prepaid for loans every month (for 129 months) would have saved Rs 12 lakh as interest, but also resulted in a tax loss of Rs 2.4.  So, effectively you gained Rs 9.6 lakh.

However, if Rs 10,000 were pumped into equities, it could have yielded Rs 26.4 lakh (@12% a year). Having said that, market returns are also seldom predictable and there will be ups and downs along the way.

Spread the Risk

So, the big question is whether to pay down the mortgage or invest for retirement. You need not necessarily choose between the two. You could partly allocate your extra savings for prepayment (till it is tax-effective for you), while also continuing to invest for retirement. That way you wouldn’t compromise on any of your long-term goals.

Achieve all your financial goals with Scripbox. Start Now