My wife and I had taken a home loan from a financial institution eight years ago and my outstanding is Rs 10 lakh. My mother, aged 70, received her share from settlement of her father's property. As I am her only legal heir, she paid me Rs 5 lakh. Currently my home loan interest is 13 per cent and balance tenure is seven years. Is it advisable to close the home loan with the money or is it better to deploy it in fixed deposits to take advantage of the high interest rate regime?
— Chander
Borrowing cost is rising and this is a big blow for those with home loans. It may be prudent for a borrower to close the loan. However, with a spate of customers planning to pre-close home loans, financial institutions have become very rigid on pre-closure penalty. Some have started insisting on proof of source for money before accepting pre-closure cheque. Loans availed from employer, relatives, friends and family members who are not co-borrowers will not be accepted as own source of funds and any such a pre-closure will attract penalty. Going by this clause in the contract, your mother is not a co-borrower and so your pre-payment will attract penalty.
As you are her only legal heir, ask your mother to deposit the proceeds in the bank to enjoy high interest. You can avail the tax deduction for the payment of interest and principal on the home loan, rather than paying a pre-payment penalty of 2 per cent. Your mother is a senior citizen and can earn 10-11 per cent interest on deposits for certain tenures. To bring down your interest rate, pay one-time fee on the outstanding loan amount to swap to lower interest rate, which may cost you 0.5-1 per cent.
I will retire in four years. I have home loan outstanding of Rs 5 lakh (loan period is 15 years; loan for Rs 20 lakh current interest rate 12 per cent) personal loan for Rs 3 lakh and I have availed an education loan of Rs 8 lakh for my daughter's higher education in 2009. I had been to an overseas assignment for two years and saved Rs 10 lakh in the trip. Please prioritise my repayments. Instead of closing my loans is it worth saving for my retirement?
— Chitti Babu
Of all the loans, you should without a doubt close personal loan. Unlike the other two loans, personal loan will not bring down your cost of borrowing with tax deduction. You have not disclosed the corresponding interest rate, so we presume that your interest cost on home loan is higher than the one on education loan.
With the home loan repayment running up to your retirement, higher interest rates will hurt. But if the interest outgo on your home loan is higher than your education loan, it will help you to avail higher deduction. If this is the case, closing your education loan will be beneficial given the spread in the interest rate.
My credit card outstanding is Rs 2.5 lakh. I hold 200 units of gold ETFs, is it advisable to pledge my gold ETFs and avail loan to settle my dues or should I take personal loan from my credit card banker to close my outstanding?
— Seth
Loan against gold ETFs is a cheaper form of borrowing than converting your credit cards outstanding as personal loan. Personal loan interest rates will be 15-18 per cent because it is an unsecured loan. It will also attract a processing fee and pre-closure penalty. But if you avail loan against gold ETF units, you can borrow at 15 per cent. But the catch is that you can raise only 75-80 per cent of the present net asset value of the units. As you hold 200 units, raising Rs 2.5 lakh will not be difficult, but loan sanction may take a little longer than converting your outstanding as personal loan. But considering the interest spread, it is worth considering loan against your gold ETFs.
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