I’m planning to take a home loan of ` 10 lakh from a bank at a fixed rate of 10.25% for the first two years, after which I plan to switch over to a floating rate of interest. Should I go for a tenure of 15 years or 20 years? What are my investment options? Should I consider repaying my loan as quickly as possible?
- Ajay Bhaskar If you are likely to be in a position to pay the loan quickly as you might have surplus funds in the future, you should look at using the overdraft home loan facility offered by banks. Your surplus money lies in an overdraft account and effectively reduces the interest amount on the home loan.
Here you have a current account linked to your home loan account with the same bank. You can then deposit or withdraw from this current account just like any other current account. Every month when the loan installment is paid, interest at the applicable rate is calculated on the aggre- gate principal outstanding after taking into account the balance, if any, in the linked current account.
The advantage of this overdraft account is that it allows you to use both your temporary and permanent cash surpluses to reduce your interest liability on your home loan, and at the same time retain the flexibility of withdrawing the surpluses for other uses as and when you may require. This effectively helps you to earn interest on your current account balances.
Putting money in the linked account is as good as prepayment. Additionally, it gives you the flexibility to take back any portion of prepayment if you so desire. As long as you keep the extra money deposited in the account, it serves your purpose of prepayment and gives you the buffer available balance in case you need it.
If you choose this, then you should go in for the longest tenure since it will give you lower EMI commitment and let you save on interest with the surplus that you have.
The answer to your question on whether you should repay your loan quickly will depend on whether you can earn higher post-tax returns on your surplus funds.
This decision will also depend on one’s preference to be debt-free at any cost.
I bought my house five years ago through a home loan. I reside here currently but I want to sell it and move into another house that I have finalised. If I find a buyer who can pay me the initial amount in cash/cheque, I will be able to settle my principal outstanding with the bank and get my papers released. Alternatively, if the purchaser goes for a home loan, can my existing loan be transferred to him/her? Which of the two cases is better?
- Vaibhav Sharma Please note that in case you transfer the property within a period of five years from the end of the financial year during which possession of the property was taken, then all the tax benefits availed under section 80 C on this property shall be treated as income of the year in which such property is transferred. In the first case where the buyer is able to pay the initial amount, you can pay the loan and obtain the property documents. Coming to the second case, there is no such thing as transfer of home loan. In case you want to sell the property, you will need the bank’s consent for the same as long as there is any amount outstanding.
This consent letter will provide the amount, on payment of which the outstanding loan will be fully paid. Harsh Roongta is CEO, Apna Paisa. He can be reached at firstname.lastname@example.org