Home loan offers for festival season: are they worth it?
I am 38 years old and my current relationship with home is ??1.5 lakh per month. My wife, who is a housewife, our 5 year old daughter and my mother are our family. I have an IME of ??51,000 for my existing home loan of ??20 lakh. The balance of the loan term is 5 years. I also pay annual insurance premiums for my car, my health coverage and my temporary plan up to ??40,000. Since 2012, I have been investing in mutual funds and have built up a body of ??25 lakh. I can afford another NDE of ??25,000 after paying my current essential expenses.
I have several requests. One, with so many festival offers and the lowest mortgage interest rates, should I buy another house? Second, I have a very positive MF portfolio. With a record peak in the market, should I make profits and shift my savings to debt funds or match a portion of the profits to the down payment on the house? Third, how should I review and rebalance my overall portfolio. Fourth, I want to save for emergencies, my daughter’s college education, and plan for retirement.
Response from Raj Khosla, Managing Director of MyMoneyMantra.com.
When buying a second home, make sure your Fixed Bond to Income Ratio (FOIR) does not exceed 50% of the home’s net income. Investing in real estate takes patience and has a substantial impact on liquidity. In addition, a home loan is a long-term financial commitment and therefore it is crucial to assess your medium-term cash flow needs before deciding to buy a home. Investing in market-linked options can lead to higher returns.
With markets at astronomical levels, you have to partly book profits based on your risk appetite. Since you get tax benefits on existing home loans and can also afford an EMI of ??51000, it is recommended to stay invested in mutual funds. Reserve part of the profits and explore the STP (Systematic Transfer Plan) option, i.e. invest the saved profits in debt funds and start the systematic transfer in diversified equity funds. Partial prepayment of a home loan is certainly a good idea.
Your portfolio is well diversified (congratulations) with a bunch of financial products. Both investments and risks are covered by mutual funds and insurance policies. To begin the review, you need to assess tax planning and the availability of adequate liquidity in the portfolio. It is important to assess your cash flow needs as well as your short, medium and long term goals. It is a good idea to consult a professional financial advisor.
Review your portfolio once every three years. Emphasis should be placed on building up a short-term emergency corpus and creating wealth for children’s education; medium and long term wedding and retirement planning. Considering your age and financial needs, you should have a moderately aggressive investment plan i.e. 60:40 equity and debt inflow. Align additional investments from ??25,000 towards equity mutual funds. Most importantly, review your existing risk coverage i.e. health plan and term plan. Make sure that you are sufficiently covered (beware of the current mortgage) for any medical or fatal emergency.
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