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

HT Estates - - HTESTATES - Rishi Mehra

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.

Part pay­ments

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.

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