Why prepaying a home loan is practical
Taking a loan to its full term means you pay more interest. Make sure, however, that you have enough set aside for emergencies
Being the owner of your home is certainly a dream come true, but paying hefty EMIs for 15 to 20 years of your life can be nothing less than a nightmare.
This is the reason why most of the borrowers look forward to prepaying home loans early. Earlier, the costs involved in prepayment and closing of loans were high, which was a major deterrent for many. But banks no longer impose any such penalty. Here are a few steps to reduce your debt burden:
Go for higher EMIs
Got a salary hike or bonus recently? I f your f i nances allow you to pay higher EMIs, you should grab the opportunity. A small increase of ₹ 2,000 to ₹ 4,000 in EMI can ensure handsome savings. Take stock of your investments, returns, expenses and liabilities. If you can still spare some amount, use it for prepayment. However, you should not overstrain yourself as you may find yourself in a spot in times of emergency.
Move with changing times
Suppose your salary was ₹ 50,000 and EMI was ₹ 20,000 when you availed the loan. With subsequent hikes, if your salary is ₹ 60,000 you can easily afford an EMI of ₹ 24,000. This difference can bring down you repayment tenure by several years.
Tweak interest rate
Some borrowers prefer to switch loan either with their existing bank or a new lender. If you choose to keep your EMI high at a lower rate of interest, you will be able to close your loan early.
Most banks allow borrowers to make part payment for as many times as they like in a year. Use your salary hikes, bonus and other windfall gains towards part payment. Ideally, you should plan part payments twice or thrice a year.
Suppose you take a loan of ₹ 30 lakh at 11% interest rate for a tenure of 20 years, you will end up paying ₹ 44,31,756 towards interest only. If you are able to make part payments, you will be able to save on your interest amount by cutting the tenure short.
Live frugally for initial years
Save the money you have set aside for outings, vacations or buying luxury goods. Savings during initial years of loan will help you in managing your loan better.
Create safety net
Even if you are financially well off, you should not ignore the importance of a safety net. Do not use all your resources to prepay your loan. Situations such as medical emergencies and job loss cannot be ruled out. Keep in view other future plans for children’s education and retirement plan.
Build a corpus
If you want to close your home loan early, you must build a corpus. Make a list of expenses that are unnecessary and can be done away with. Cut down on excessive use of credit cards, shopping for luxury items. Pay off your credit card dues and other personal loans which come at high interest rates and drain out your resources. You can use the money thus saved for investment in mutual funds having good performance records.
Invest or prepay?
This is a common question that comes in the mind of a home loan borrower. Let us understand this with an example:
Ravi is servicing a home loan and is paying an EMI of ₹ 24,000. He has availed his home loan at an interest rate of 11%. Ravi earns ₹ 60,000 per month and manages to save ₹ 5,000. He is not sure whether he should invest it or use it to prepay the loan.