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Is it a good idea to foreclose a home loan with PF amount?- Property Hotline
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October 21, 2016
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7:09Now PlayingExpert: Harsh Roongta, Chartered Accountant and a SEBI registered Investment Advisor.
Question: Is it a good idea to foreclose a home loan with PF amount?
Answer: You have not stated whether the PF you are talking about is PPF with return around 8% post tax on an ongoing basis. Prepayment of the loan makes sense if the post-tax interest cost on your existing home loan is higher than 8%. Typically if your home loan rate is around 10% and your taxable income is greater than Rs 10,00,000 (marginal tax rate is 30%) then the effective post tax cost of the home loan is around 7%. In such a case making this pre-payment makes no sense. If the loan is taken for a self -occupied property then the deduction for interest is restricted to Rs 2 lakhs or a loan amount of Rs 20 lakhs approx. If your loan for a self-occupied property exceeds this Rs 20 lakhs limit then repaying the loan to bring the loan down to Rs 20 lakhs makes sense as above that the post-tax interest cost is 10% for the loan amount over Rs 20 lakhs. Where the taxable income is lower than Rs 10 lakhs also the post-tax interest cost of the loan could be equal to or higher than 8% and hence it makes sense to prepay.
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