Sharad, a bank manager, is facing a dilemma as he nears retirement. He has two properties, one of which is still mortgaged with his bank due to the home loan he is repaying. Sharad enjoys concessional rates on the loan as an employee, so he hasn’t prepaid it. He is now contemplating whether he should repay the loan before retirement and become debt-free or allow it to continue until he is 65.
Making a decision about an outstanding loan involves two main considerations: financial logic and emotional comfort. From a financial perspective, it is advisable to continue the loan if the funds used for repayment can earn a higher return than the loan’s cost. Additionally, when it comes to a home loan, if the value of the house appreciates at a higher rate than the loan, it is generally considered wise to keep the loan and invest the money elsewhere. In Sharad’s case, the concessional rate on his loan further reduces its cost, making it financially manageable even after retirement.
On the other hand, emotional comfort stems from the desire to be free of debt and liabilities. Some people, even those with stable jobs and regular incomes, prefer to prepay their loans to attain this emotional freedom. However, this decision often disregards the financial logic behind keeping the loan. Home loans can carry a strong emotional need to own a house without any liability. Selling the house to repay the loan is deemed a severe action that comes with significant emotional stress.
Considering Sharad’s imminent retirement and anticipated lower income in the future, he may not be willing to shoulder the risk of having an outstanding loan. However, arriving at a decision requires carefully evaluating the trade-off between financial considerations and emotional needs. If Sharad earns rental income from the mortgaged property, which can be used to repay the loan, the risk from his income may be lower. On the other hand, utilizing his retirement corpus or investments to repay the loan might diminish the funds available for generating post-retirement income.
Sharad should conduct a financial analysis comparing the return on his investments to the interest rate of the loan. If the investment return exceeds the concessional interest cost, it may be wise to retain the loan. Moreover, in case of an emergency, the investment corpus can be utilized to repay the loan without selling the house, ensuring a safety net.
In conclusion, the decision to repay a home loan before retirement depends on individual circumstances and preferences. While the emotional need for debt-free living is understandable, it is vital to consider the financial implications and the potential for higher returns by keeping the loan. Sharad must carefully weigh both aspects before making his final choice.
