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Most household arguments about money are trade-offs that have not been written down. Buy or continue to rent. Prepay a housing loan or invest the same sum. Sell a holding or retain it. Spend a surplus or assign it. Each pair can be examined with the tools of the previous articles: consequences, opportunity cost, cash flow and net worth. This article places those pairs on one page. It does not declare a winner. The series on loans will return to prepayment in more detail. The present purpose is the method.
Purchase provides tenure and a declining loan if instalments are maintained. It concentrates a large sum in one location, reduces liquidity, and, under the default new tax regime, yields no deduction for interest on a self-occupied house. Rent preserves liquidity and mobility. It produces no asset. The comparison is not “rent is wasted.” Rent is the price of shelter without a balance-sheet asset. Purchase is the price of shelter with a concentrated asset and a liability. Which side is preferable depends on the stability of employment, the size of the down payment relative to the emergency reserve and the systematic plan, and the instalment relative to income on a single-earner test.
Prepayment reduces future interest and improves net worth by reducing a liability. It also uses cash that cannot then be placed in the long-term investment already chosen. Under the older tax regime, interest on a self-occupied house up to ₹2 lakh is deductible; prepayment reduces that deduction in later years. Under the new regime that deduction is not available, so the tax side of the comparison is weaker. The certain saving of interest should be compared with the uncertain future value of the investment, without treating the two figures as identical. A household with expensive unsecured debt should not reach this comparison until that debt is addressed. That order is the subject of article 6 and of the next series.
Sale crystallises tax, as Series 1 described, and removes the holding from future compounding. Holding preserves the original purpose if that purpose has not changed. Sale is justified when the goal date has entered the window that requires a less volatile asset, when the thesis for an individual security has failed, or when the proceeds have a planned use that has been computed after tax. Sale in order to relieve discomfort after a decline is the trading habit examined in Direct Equity Investing. It is not a trade-off in the sense of this article.
A surplus that is spent produces a current benefit and no change in net worth, or a reduction if it is financed. A surplus that is assigned — to the reserve, to an expensive balance, or to an existing mandate — changes the stock. Both uses can be legitimate. The error is to spend by default because the surplus was not given a name before the month ended.
The correct comparison for prepayment is the interest rate on the loan after considering the tax treatment that actually applies to that household in that year, set beside the expected role of the investment the household already holds. A comparison with an advertised peak return of an unrelated scheme is not a comparison.
The Sharma household in Firozabad argued for six months about prepaying ₹3 lakh of their housing loan. When both sides were written down, they found they still carried a credit-card balance. The trade-off they had been discussing was not the first trade-off in the queue. They retired the card, then divided the next surplus between a modest prepayment and the existing systematic plan. The argument ended because the order of work had been named.
Most trade-offs become quieter when they are placed in sequence. Expensive unsecured debt precedes a housing-loan prepayment debate. An incomplete emergency reserve precedes a debate about a second property.
Conducting a sophisticated comparison of prepayment and investment while an unsecured balance at a much higher rate remains unpaid.