My Provident Fund account balance is Rs 14 lakh. Should I withdraw it to pay home loan?
Welcome to the Reader’s Query segment of FE Money. Today, Darshan Pawar writes he had taken a total home loan of Rs 40 lakh in 2019, of which the outstanding amount now is Rs 25 lakh. Darshan is also doing a monthly SIP of Rs 10,000 and he has Rs 14 lakh in the Employees Provident Fund (EPF) account.
Darshan wants to know whether he should prepay his home loan or increase the SIP amount. He also wants advice on whether it will be beneficial to withdraw money from the EPF account to pay the home loan.
Arun Kumar, VP and Head of Research at FundsIndia, responds to Darshan’s query.
If your expected return from Mutual Fund SIP investment is 4% more than your Home Loan Interest Rate then you can increase the SIP. Else, it is better to prepay the debt.
The buffer of 4% is to accommodate for the possibility of an increase in home loan rates and lower-than-expected investment returns. For example, if you assume 12% returns from Equity SIP and 9.5% home loan interest rates, it is better to prepay your home loan instead of increasing the SIP.
Further, if your home loan rate is more than the EPF rate, then you can prepay using the EPF amount.
Also Read: I am 30 years old and unmarried, earning Rs 50,000 per month. Which mutual fund should I invest in?
Replying to a similar query by another reader recently, Viplav Majumdar, a Certified Financial Planner and Director of Planyourworld Training Academy, suggested that increasing SIP with extra money in hand may be more beneficial in the long run than closing the home loan.
“The core idea is to get a return on borrowed money if you are paying 9% on the loan amount and if you are getting 12% in regular plans of mutual funds and 13.5% in Direct plans, you are getting much more return
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