Retiring with a home loan? Here’s when using retirement savings to repay it may make sense

Retiring with an ongoing home loan can be difficult. It can force borrowers to make a difficult choice: Should you use a portion of your retirement savings to become debt-free, or continue paying the equated monthly instalments (EMIs) and preserve your corpus?

Now, there is no universal answer to this question. While making repayments on the pending home loan can help reduce applicable interest costs and remove a fixed monthly obligation, utilising too much of the available retirement corpus can also create financial stress and challenges later on. This is because such a strategy can also expose an individual and their family to sudden medical emergencies and other essential needs.

Therefore, the key to tackling such situations is to avoid exhausting retirement savings simply to close out a home loan. Borrowers should focus on first analysing their outstanding principal, remaining tenure, interest rate, monthly cash flow needs, and the amount that they need to fund expenses after retirement.

Should you use retirement savings to repay home loan?

Sarosh Amaria, MD, Tata Capital Housing Finance Limited, explained this in detail, stating, “In an ideal situation, using your retirement savings to pay off a home loan at age 60 is generally not recommended unless your remaining corpus is large enough to comfortably cover both the payoff and future expenses. While it may eliminate monthly EMI stress and reduce total interest outflow, it leaves no time to rebuild your depleted savings and eventually impacts the financial stability for the rest of the time. Exhausting your corpus leaves you vulnerable to unexpected medical emergencies, inflation, or rising living costs; hence, it is always recommended to liquidate non-retirement assets or utilise existing cash flows to manage and systematically clear your home loan without jeopardising your core retirement corpus.”

Kapil Makhija, COO, MinEMI, added a different perspective, stating, “At 60, carrying a home loan means paying 8 to 9 percent interest while retirement savings earn 7 to 8. That arithmetic alone favours repaying. If the house is self-occupied, closing the loan secures the roof and removes the largest EMI from a fixed income. If it is an investment property where rent covers the EMI and the area is appreciating, the loan can continue. The one rule: never empty the corpus to do it. Keep at least three to five years of expenses liquid, because at this age, banks will not lend it back to you in an emergency.”

What should retirees consider before prepaying?

Atul Monga, CEO & Co-Founder, BASIC Home Loan, highlighted important aspects to carefully consider before proceeding with prepaying a home loan at 60. He stated, “For borrowers in their 60s, the decision to repay a home loan should be evaluated alongside their retirement corpus and future cash-flow requirements. If the home loan carries an interest rate of around 7-9%, borrowers should compare the cost of the loan with the post-tax returns from their savings and investments.”

On the aspect of managing retirement savings responsibly without stretching finances, Atul added, “At the same time, retirement savings should not be depleted solely to become debt-free. It is important to retain an adequate emergency corpus and funds for future expenses. If there is sufficient surplus after accounting for these needs, part-prepayment can help reduce the outstanding principal and overall interest burden. The decision should ultimately depend on the loan rate, remaining tenure, outstanding principal and the borrower’s broader financial position.”

Hence, using retirement savings to repay a home loan at 60 can make sense only when sufficient funds remain to meet future living expenses, healthcare needs, unforeseen expenses and emergencies. If repaying the home loan entirely would substantially reduce the retirement corpus, partial prepayment or continued repayment may be the wise choice to consider. The key is to maintain economic balance and financial stability while making such a decision.

Proper financial planning is important to successfully tackle loan repayment challenges because the right approach can differ from person to person, depending on individual circumstances and finances. Before making a decision, it is wise to seek professional guidance from a certified financial advisor.

Eventually, becoming debt-free can definitely provide immense peace of mind in retirement. Still, it should not come at the cost of financial security in the years that follow.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Evaluate your individual finances, loan terms and retirement needs before making any prepayment decision.