I am 45 years old and have a surplus of ₹10 lakh. Should I start SIP or prepay home loan?

-Name withheld on request

The ongoing low-interest regime has prompted many banks and HFCs to offer home loans in the range of 6.4-7% per annum, with even existing home loan borrowers offering lower interest rates. The borrowers can take advantage of this by transferring their existing loans to the lenders. So, the first thing that I recommend is to contact your existing home loan lender regarding the possibility of reducing your interest rate. If they refuse, contact other banks and NBFCs with whom you have deposit or lending relationships regarding their home loan offers.

Follow up by visiting online financial marketplaces to compare home loan rates offered by other banks and HFCs. Also use the online home loan prepayment calculator to find out the savings by transferring the home loan, taking into account the processing fee and other charges that may be charged by the new home loan lender. Use the balance transfer option only if the savings in interest cost are significant.

As far as utilization of your existing investible surplus is concerned, the decision should be based primarily on whether your existing investments and monthly contributions have significant financial goals like post-retirement corpus, children’s higher education fund, etc. enough to get it. If they seem inadequate, then try to increase your monthly SIP contribution. If your monthly SIP contribution seems substantial and/or your risk appetite has reduced due to increased market valuation, then opt for prepayment. Prefer the option to reduce the tenure as it leads to higher interest cost savings as compared to the EMI reduction option.

Naveen Kukreja – CEO and Co-Founder, Paisabazaar.com.

(Questions and thoughts at mintmoney@livemint.com)