In pursuit of owning our dream home, many of us direct all of our life’s earnings towards this one cause. We strive hard to get the best home loan rates to fund our property purchase. A home loan is a long-term commitment that can range anywhere from 10 – 30 years or longer. That’s why another essential factor that most overlook is to clear this loan as soon as possible. If you’re able to smartly pay off your housing loan faster, you would be free of the financial commitment quicker.
Following are a few tips that you can use while planning a home loan:
1. Opt for a Home Loan Which Allows for Part Payments
The home loan which you avail is based on your creditworthiness as well as on your income. However, it is quite natural for you to expect that your income will increase in the future. This, in turn, increases your affordability. Therefore, you can choose to avail a loan for a maximum tenure and repay the same before the loan tenure period. Always try to opt for financial lenders who offer prepayment feature so that you can pay more than the required monthly payment whenever possible.
2. Always increase your EMI amount Whenever Your Salary Increases
Whenever you get a salary hike, always aim to increase the EMI of the availed home loan. This will help you to reduce your loan tenure period along with the interest rates. You can choose to contact your financial lender so that they can restructure your existing loan based on your current salary. This step will also boost & strengthen your creditworthiness.
3. Invest Specifically with the Aim to Prepay the Loan
Another major dilemma of any homebuyer is to choose between investing and prepaying the home loan with his/her savings. Let’s take an example to analyse the problem. Consider two clients named Ravi & Samir.
Let’s assume a scenario wherein Ravi is paying an EMI of ₹40,000 towards his Home Loan. The applicable interest rate is 10.75% and his salary is around ₹60,000. Also, let us assume that he is able to save around ₹10,000 on a monthly basis. If Ravi chooses to invest his savings in PPF, then he can expect a return of around 8.5-8.7%. However, if he directs this same amount towards his EMI on the home loan, then he can save the 10.75% interest on this amount. It only makes sense to invest in those financial products which generate returns greater than the interest rate applicable on the Home Loan.
Now let’s assume that Samir is paying an EMI of ₹55,000 towards his loan. Prior to availing the home loan, he had invested in a Mutual Funds Fixed Deposits of a bank. The returns earned through Mutual Funds are around 10% on an annual basis. The client also enjoys returns of around 9.75% on the FDs.
By applying the same logic of Ravi, it makes sense for the Samir to liquidate his existing investments and try to prepay the availed Home Loan. By doing so, he can generate indirect returns which are equivalent to that of the home loan interest rates through savings.
4. Try to reach the Principal Amount as Early as Possible
During the first few years, the loan borrower is just paying towards the interest without causing any substantial reduction in the principal amount. Therefore, try to make the partial pre-payments as early as possible so that it helps to reduce the interest amount much faster. After you hit the principal amount, you can observe the difference in the applicable interest rate and the remaining amount.
5. Always keep 3 Months of EMI Payment in your Account
This is essential for paying your EMIs regularly. This strategy can help you out in case of any unforeseen financial emergencies. This will also make sure that you do not default on your payments. By having an amount equivalent to three months of EMI, you can get some breathing space.
6. Use your Fixed Deposits
You can also make pre-payment towards your loan if you possess fixed deposits of around six times your salary. A fixed amount gets you interest of around 6-7% on an annual basis, while you might be paying around 9.65% interest towards your home loan. It makes no sense to block any money for earning lower interest rates. Rather, you can use that amount to reduce your financial debt.