Plan­ning To Close Your Home Loan Early?

Accommodation Times - - .. Housing Finance.. - Arvind Jain, Man­ag­ing Di­rec­tor - Pride Group

The most im­por­tant ben­e­fit of clos­ing your home loan early is ob­vi­ous - you be­come free of EMIs, which are prob­a­bly the big­gest recurring debt cur­rently strain­ing your monthly in­come. This is def­i­nitely a de­sir­able sce­nario un­der the right cir­cum­stances. In pre­vi­ous years, the penalty in­volved in pre­pay­ing or clos­ing a home loan was a ma­jor de­ter­rent, but banks can no longer levy such a penalty.

As­sum­ing that get­ting rid of this monthly bur­den is more im­por­tant to you than the tax ben­e­fits of ser­vic­ing a home loan, you need to start plan­ning your fi­nances and get ready for the big push. This is not an overly com­pli­cated process, but it does re­quire you to keep your ul­ti­mate goal - clos­ing your home loan - firmly in mind at all times. The ideal time to start act­ing on this goal is while you are in your late 30s or early 40s.

This is usu­ally the pe­riod when most pro­fes­sional people are done with job hop­ping and are earn­ing a steady salary with rea­son­able growth prospects. Most will also have been ser­vic­ing a home loan for at least 4-5 years. It bear to re­mem­ber that banks struc­ture home loans in such man­ner that they ob­tain the largest part of the charge­able in­ter­est in the first few years of the loan ten­ure. Also, this is the pe­riod in which one should al­ready be plan­ning fi­nan­cially to­wards one's re­tire­ment.

Re­gard­less of how fi­nan­cially se­cure you cur­rently are, the first step to­wards even­tu­ally clos­ing your home loan early is al­ways the cre­ation of a safety net. Pay­ing off a home loan in­vari­ably re­quires a con­sid­er­able cor­pus of ac­counted-for cash. If you use all your avail­able fi­nances to close your loan, you are left with noth­ing to han­dle un­ex­pected con­tin­gen­cies. These con­tin­gen­cies could be any­thing from los­ing your job to med­i­cal emer­gen­cies.

To keep you and your fam­ily sol­vent in case you need to find a new job, you should have at least 6-8 months' worth of salary saved up. These sav­ings should not be tapped for any but the in­tended pur­pose. To safe­guard against the of­ten crip­pling ex­penses of med­i­cal emer­gen­cies, avail of med­i­cal in­sur­ance with a cover of at least 10-15 lakh for your whole fam­ily. Ad­di­tion­ally, you must en­sure that your chil­dren's ed­u­ca­tion is taken care of, and that you have in­vested in a solid re­tire­ment plan.

With the fi­nan­cial safety net in place, it is time to build the cor­pus that you will need to close your home loan early. You should be­gin by tak­ing a close look at all the ways in which you lose money each month. For in­stance, you may own one of more credit cards with un­usu­ally high in­ter­est rates. You may have availed of these cards be­cause of the glitzy ben­e­fits you were promised by a sales ex­ec­u­tive - ben­e­fits which you prob­a­bly never use.

If you are not a heavy shop­per of lux­ury items, a fre­quent in­ter­na­tional flyer or some­one who is ex­cited about ac­cess to the pre­mium air­port lounges, you don't need these cards. Get a sim­ple, no-frills credit card with a rea­son­able credit limit and can­cel all oth­ers. The sav­ings on in­ter­est rates will make a sig­nif­i­cant dif­fer­ence.

Like­wise, pay off all per­sonal loans and sell off or dis­con­tinue money-drain­ing time-share va­ca­tion mem­ber­ships if you do not use them reg­u­larly. To­day, most of these mem­ber­ships ex­tract highly in­flated an­nual charges which in­crease ev­ery year - you can ac­tu­ally hol­i­day more cost­ef­fec­tively with­out them, with a bet­ter spread of va­ca­tion lo­ca­tions.

Most people as­sume that the best way to save up for pay­ing off their home loans is to ac­cu­mu­late money in sav­ings ac­counts or fixed de­posits. The fact is that the mea­gre in­ter­est you earn on money in a sav­ings ac­count does not even beat in­fla­tion, so you ac­tu­ally lose money by keep­ing it there. Fixed de­posits are also not what most people as­sume them to be. In­vest­ing in fixed ma­tu­rity plans or mu­tual funds with con­sis­tently good per­for­mance records is a much bet­ter op­tion.

The in­ter­est earned on fixed de­posits is fully tax­able. On the other hand, the re­turns earned on mu­tual funds at­tract div­i­dend dis­tri­bu­tion tax or cap­i­tal gains tax, depend­ing on whether one has opted for the div­i­dend or growth op­tion. In ei­ther case, the taxation on such funds is lower than the in­come tax paid on fixed de­posits. The lower tax and higher re­turns of mu­tual funds trans­late into bet­ter earn­ings.

Even af­ter mak­ing these in­vest­ments, do not park all your liq­uid funds in a sav­ings ac­count. In­stead, move as much of your dis­pos­able in­come as pos­si­ble to a liq­uid fund, which earns you higher in­ter­est. Liq­uid funds get you bet­ter in­ter­est than sav­ings ac­counts, and you still re­tain ready ac­cess to your money if you need it.

If you fol­low these guide­lines, you will find that you can reach the point at which you can pay off your home loan when­ever you wish much faster. It re­quires dis­ci­pline and plan­ning, but it brings you much closer to the proud day on which your bank hands you the own­er­ship pa­pers of your fully paid- up house.

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