How to reduce the Home Loan EMI and invest in Mutual Funds through SIP

Query 1: HDFC charges 0.5% conversion fee (plus tax) on the outstanding principal balance to move to the current adjustable rate of interest. The current adjustable rate offered by HDFC is 9.9%, has been in effect from April 2015. There is an RBI Monetary Policy meeting tomorrow (Aug 4). So one needs to wait for the RBI Governor’s announcements. Most market experts do not expect RBI to reduce rates in 2015. However, they expect RBI to start reducing rates from January of 2016 onwards. If you get an interest rate lower than 9.9% within the next six months, then waiting for a lower rate makes more sense. While the interest payment at your current rate of 10.8% will be higher by about Rs 20,000 over the next 6 months than your interest payment at 9.9%, the savings in conversion fees (about Rs 25,000) will more than offset the higher interest payment. On the other hand if HDFC does not change the current adjustable rate for a long period of time, then it makes sense to opt for the lower rate now, because savings in the lower interest rate will more than offset the higher interest payment. Having said that, as discussed earlier, a rate cut in Q1 of calendar year 2016 is what most market experts are expecting at this point. The RBI Governor’s outlook on interest rates may provide further insights into the timing of the next rate cut.

Query 2: Your current EMI is Rs 58,000 and the balance tenure is 144 months. Assuming no prepayment, your total outgo over balance tenure will be Rs 83,52,000. If you reduce your EMI to Rs 52,000 and increase your balance tenure to 163 months, your total outgo over the balance tenure will be Rs 84,76,000, an increase in Rs 124,000 over your current projected outgo. So the question is will the Rs 6,000 savings in EMI, reinvested in mutual funds generate enough return to offset the your increased outgo on your loan? If you invest Rs 6,000 through monthly systematic investment plan in a diversified equity mutual fund over a period of 12 years (which is the current balance tenure of your home loan), then at 15% rate of return you will generate a corpus of Rs 24 lacs. This is will more than offset your additional outgo on your home loan. Please note that historically good diversified equity funds have generated more than 15% over a 10 year time horizon. However, since mutual funds are market linked instruments you will have to contend with volatility in the interim period. If you want lower volatility, then you can opt for hybrid funds which invest in both debt and equity. Even these funds can potentially give enough returns to make this option offset your additional interest outgo. You should consult with your financial advisor and make a considered decision.