A home loan enables one to achieve one’s dream of being a proud homeowner. However, it is also the biggest financial commitment one decides to make. Home loan repayments are done in equal monthly instalments (EMIs) over a loan period of at least 10 to 25 years. Managing your loan repayments will not only ensure an early relief from your debt, but also effectively reduce the interest you pay over the tenure of the loan.
Here are some tips on how to manage your home loan repayments in the most cost-effective manner:
1. Choose a suitable loan repayment period
While availing a loan, request for a suitable loan period depending on your annual income. Lenders generally consider 35% to 50% instalment to income ratio depending upon the income level of the applicant. Choosing a longer repayment period will result in lower EMIs (Equated Monthly Instalments), hence will strengthen your cash flow position. As and when you have additional funds, the same can be used in repayment of the loan as there are no prepayment charges.
2. Make pre-payments
Making a lump sum pre-payment is the fastest way to reduce the payable interest amount and to decrease your long-term liability. Banks/ housing finance companies (HFCs) do not levy a charge for partial payments/ pre-payments on the loan availed on floating rate and the pre-payment amount can be as low as Rs 10 000. Any gains on stocks and shares, property sold, bonus on your salary, closing of deposit schemes, maturing of tax saving investments, and so on, can be used to pre-pay the entire or a part of the outstanding home loan amount.
3. Manage your funds
Make a list of all your savings and investments like EPF, PPF, postal deposits and even ULIPs. The objective is to maximize the cash flow by eliminating unnecessary investments that do not generate enough returns or have turned futile over time. It will be beneficial to close all those investments and focus on paying the differential amount towards the EMIs on your home loan.
4. Switch to a lender that charges a lower interest rate
This option facilitates loan borrowers to transfer their entire outstanding home loan balance to another lender at a lower interest rate and at better terms and conditions. One needs to keep an eye out on the changing trends in interest rates as banks/HFCs lower their lending rates at different time intervals. It is advisable to approach your existing lender to lower the interest rate, as shifting the loan to another lender may involve additional cost and hassles. The Reserve Bank of India has already advised banks to give a fair treatment to their existing customers by aligning rate of interest with MCLR (marginal cost of funds based lending rate) to benefit the existing customers from change in rates.
5. Do not delay or miss your monthly payments
It is crucial to maintain a good credit history as it reflects your financial stability. Missing EMI payments will majorly burden the surplus cash from your fixed budget and lenders might analyse your credibility as a loan borrower. Skipping on instalments will adversely affect your credit score and hence might harm your chances of getting a credit card or a loan in the future.
If you abide by these simple yet effective strategies to manage your home loan, you can actually end up saving a lot of money.
(By Deo Shankar Tripathi, MD and CEO of Aadhar Housing Finance Ltd)