With home loan amounts and tenures stretching up to 30 years, it has long-term impact on your finances. Hence, you need to carefully plan and manage your home loan EMIs.
Most of us depend on a home loan to buy our dream home. On the one hand while property adds to your tangible assets, on the other, you can avail tax benefits on both the principal as well as interest payment, under Section 80C and 24 of the Income Tax Act, respectively. However, with home loan amounts and tenures stretching up to 30 years, it has long-term impact on your finances. Hence, you need to carefully plan and manage your home loan EMIs. Here are some tips that should help you in managing your home loan smartly:
1. Choose the right loan tenure
Longer home loan tenures imply lower EMIs, which enable the borrower to repay the loan comfortably, without stressing their finances too much. However, a longer tenure also increases the cost of the loan, as you end up paying for the interest for a higher duration.
While choosing your home loan tenure, keep in mind your age, income and repayment capacity. Since home loans usually involve higher loan amounts, borrowers should find out the shortest loan tenure wherein they are able to pay the EMIs easily, without compromising on other life goals or lifestyle.
Use online EMI calculators to consider various EMI amounts, basis the interest rate, loan tenure and loan amount.
2. Increase your EMI amount over time
Since most borrowers from the salaried class get an annual hike, they should also try increasing their EMI amount simultaneously. Hiking your EMI amount every year would drastically reduce your loan tenure, as you would be paying more than the actual EMI amount, which would help in reducing your total outstanding loan amount. Whatever extra you would be repaying, over and above the set EMI, would act as a prepayment, therefore lowering down your loan tenure to a great extent.
For example, a home loan of Rs 50 lakh taken at 8.5% for a tenure of 20 years, would involve an EMI of Rs 43,391. However, a 10% increase in EMI every year would end your loan in less than 10 years (9 years 6 months).
3. Prepay whenever you can
Prepaying your home loan is a quick way to lower your outstanding loan amount, reduce total interest payout and, therefore, decrease your loan tenure as well. For floating interest rate term loans, banks cannot charge prepayment/foreclosure penalty, due to the RBI’s regulation. Making part prepayments directly reduces your outstanding principal amount, along with saving the interest component over the loan tenure.
Suppose you intend to prepay Rs 120,000 within next 1 year. You may start saving Rs 10,000 per month in order to accumulate this amount for prepayment purpose. Moreover, when you prepay and continue paying the same amount of EMI after prepayment, your loan would finish before the tenure ends. However, the lender would generally offer you to lower your EMIs by continuing with the same loan tenure post prepayment.
4. Look out for home loan balance transfer
Borrowers should consider opting for a home loan balance transfer (HLBT) in case either the existing lender’s competitors are offering lower interest rate and terms of service or a home loan top up request has been denied by the current lender or additional product features are being offered by other lenders.
Since borrowers would have normally paid a major part of their interest component during the earlier stages of the loan itself, a home loan balance transfer won’t lead to much savings if you opt for a higher tenure again. Borrowers should try to keep their new tenure exactly the same as the remaining tenure of your existing home loan. This would save you from the burden of extra interest payment, which you would have already paid in case you took a higher tenure than the remaining one. Additionally, opting for the highest possible tenure for the new loan would help in easing off the EMI burden, and this loan can be paid off whenever you have surplus funds due to promotion, bonus or upon maturing of some investment.
But before you consider a home loan balance transfer, compare the amount of savings the transfer will result in with the cost of transfer in the form of processing fees and charges. Choose home loan balance transfer only when you are able to save a significant amount over time through it.
(By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com)