There are a lot of things which you plan for your retirement. A retirement is a stage where, you think of having no financial burdens on your head and try to live a happy life.
As we all know, we happen to make some big purchases during our working days, let’s say a house which was bought on loan. When you are nearing retirement, the very thing which can bother you is to foreclose the loan and live without any financial burden. Many people fail to make such important decision out of a lot of confusion.
Today we will sight you if it is beneficial to prepay your home loan when nearing retirement,
Let’s take Yogesh as an example here. Yogesh is 56 and is working for a telecom company as a telecom engineer. His company has opened up a voluntary retirement scheme and Yogesh is considering taking it. He has been a very good saver of money and is confidence that he will be able to manage his retirement with the help of VRS payout, Gratuity, Provident Fund and other previous investments. His only worry is the home loan interest rate which still has four years to go.
He is planning to use some part of his retirement funds to pre-close this home loan and wants to live a debt free life. He is getting suggestions from family and friends that he would lose on the tax benefit he is been getting if he forecloses the home loan.
What would Yogesh do?
Yogesh is planning to foreclose the home loan just because he does not intend to pay EMIs after retirement. If he plans to invest the same amount of money which he was considering closing the loan, somewhere else and getting a higher return, it would make sense to invest rather than closing this loan. If he is considering using a portion of his retirement fund to close the loan he will compromise on his retirement income. The same can also free him from the loan EMI.
Yogesh’s family and friends propose him not to close the loan as it fetches him tax benefits. Since only four years are remaining of the home loan, the principal component of the loan is more than the interest component. As we know, that the banks collect interest money during the initial phase of the loan.
Hence, the tax benefit the family members were suggesting is not so big. On the other hand, the tax applicable for the retirement income is lower than usual standards. This means continuing loans after retirement will not result to significant tax savings.
This proves that it will be beneficial for Yogesh if he pays off his loan and live a happy life without any debts. Imagine if by any reason, he fails to make an EMI payment it could result to hampering his credit score. Yogesh can pay his loan off from his retirement fund and can invest the remaining amount in short and long term investment considering he has secured his budget at least for the next twenty five years.
If the loan tenure would have been seven years or more and the person had a chance taking a voluntary retirement solution, the situation would have been different and hence the possibilities also would have been different.
Not only home loan, one can be burdened with various other loans and credit card payments. Always do a proper analysis of what is the best option for you and lock it in. A small hand research can turn out to be financially fruitful in the future.
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