Firstly you should plan before going any home loan, whether it is too high. If your problem is one where the EMI is too high, due to either an increase in overall interest rates, or an increase in your personal commitments to yourself, your loved ones, or any other matter personal to you that reduces your bank balance, or a combination of these factors and others, then what the bank will do is restructure your loan.
Almost all house purchases today are funded by a NBFCís and banks. This means payment of heavy amount as down payment as well as monthly payment in the form of Equated Monthly Installments (EMI). The amount you pay as an EMI every month depends on the loan amount you borrow, which again depends on the down payment you made for your house.
Nowadays, more and more borrowers are families where both the husband and wife are working. As a result, loan eligibility is more, and people think they can afford to borrow more simply because they are eligible to do so. However, remember that banks grant you loan based on the net take home pay, and not based on what you save. Hence you must borrow only to the extent you can comfortably repay. This means, to buy the house of the same value, you should increase the amount you pay as the down payment. Wait till you can save to pay a considerable amount as down payment, so that your borrowing is reduced. If you still feel that this is a stretch, settle for a house with a lower budget.
1. Plan for prepayment if your salary increases
Increase your contribution to yearly prepayment corpus (discussed in point 1) if your income increases. If you receive a raise each year, it would be sensible enough to divert your funds towards this goal unless you require the money elsewhere.
2. Analyzing your salary other than on the EMI
Look at areas where you can cut back expenses, especially on the discretionary areas. For instance, if you find out that expenses on eating out comes to Rs.5000 per month, look at how you can reduce this Ė either by reducing the number of outings or cooking attractive options at home which will consume much less money.
3. Look to invest in mutual funds
If you have any excess savings during the month, invest in good quality mutual funds, which will give you good returns over the long term. Since an ideal investment in mutual fund should be more than 5 years, you can continue investing in the fund for more than 5 years and then use that money to prepay the principal. It can be a smart option since here you can expect to earn 12 to 15 per cent tax-free returns. This can be in addition to prepayment amount to be shelled out each year as mentioned in point 1. You can also have a look at balanced funds for this purpose.
4. Look at your home loan yearly statement
This statement will give you an idea as to how much amount of your monthly EMI is going towards the principal component and how much is the interest component. Many borrowers seldom see home loan statements and thus are unaware of huge interest component they are paying.
5. Keeping an emergency fund
This is the basic rule of financial planning. Make sure you build up an emergency fund of 4 to 8 months so as to take care of any unforeseen expenses. It will also help you not to shell out funds you are saving for prepayment of the home loan. In nutshell, you need to ensure you have enough liquid savings to handle emergencies such as unexpected medical expenses.
6. Plan your EMI with life partner
If both you and your spouse are working, then there it be income credits in both your salary accounts. Discuss and take a joint decision in advance on the expense heads which will be debited from your account and your spouseís account. When you have different accounts for tracking different expenses, it becomes more disciplined and easier to control expenses. This will also allow you to track patterns of your expenses on the same head in different months.
7. Do remember that Home loan prepayment penalty is removed by most of banks
Do remember, some time back RBI had indicated that banks would be required to scrap prepayment penalties. The charges are waived off on prepayment charges for all customers apart from some minimal charges. If your loan has the flexibility to allow increased regular repayments and lump sum repayments without penalty, take advantage of it whenever you can.
Do remember, saving on the net interest is the most significant advantage of prepaying the home loan, other than the fact that you will retain the complete ownership of the house earlier than planned. The longer the loan tenure, the more the interest repaid, hence its best to repay your home loan in the shortest loan tenure possible, provided it can be managed comfortably within your income. The more you pay off your home loan, the more of the property you own, and the more equity you build up.
- By Brijesh Parnami
CEO Ė Distribution, Destimoney Enterprises Private Limited
(The views expressed here are author's own)