The thought of owing someone a debt is an uncomfortable one for most of us. When the amount owed is large, as in the case of home loans, the cognitive discomfort can be significantly greater. Additionally, the monthly financial burden of paying EMIs and housing loan interest isn’t exactly everyone’s cup of tea. To counter this, many homeowners choose to prepay their home loans.
There are multiple schools of thought when it comes to prepaying a home loan. However, there is no one-size-fits-all approach, and the decision must be made considering both financial and personal aspects.
Merely making the decision to prepay your property loan doesn’t solve your problem, though. Figuring out how to save up for prepayment is the key to succeeding without financial discomfort.
If prepaying your home loan is an option you’d like to consider, here’s a short guide on how you can make that happen.
Consider the decision
Determine whether prepayment is right for you. Home loans offer tax benefits that need to be taken into account. For instance, the housing loan interest (upper limit of Rs 2 lakh) can be deducted from taxable income. However, if your interest amount exceeds the upper limit, prepayment could save you the additional cost. Every individual’s situation is unique and should be assessed carefully before making the choice.
Fortify your backup
Get your financial safety net in place before committing to prepay the home loan. A general rule of thumb is to have the following taken care of:
- Emergency funds (medical or otherwise)
- Backup savings for EMIs and regular expenses in case of loss of employment
- Children’s education funds
- Other recurring financial liabilities
Plug the leaks
Scrutinise your financial records to identify where you tend to haemorrhage money. They usually show up in the form of unnecessary frills such as credit cards with additional privileges (that you don’t use), unused memberships (clubs, gyms and recreational establishments), loans with high-interest rates (here refinancing is an option) and so on. Eliminating these situations will improve your disposable income and thereby your savings.
Get creative
Saving up to prepay home loans can be simplified with some thought. Consider replacing your expensive forms of entertainment and recreation with creative, cost effective solutions. Tighten the purse strings as far as possible to boost your monthly savings.
Hike up the EMIs
This is a simple yet effective option. Even marginal increases in EMI payments can help reduce the principal amount. This helps reduce the tenure of the home loan. Reduced home loan tenure then results in lower total home loan interests
Utilize windfalls
Consider partial repayments from unexpected sources of income such as bonuses, gifts from family and so on. Check with your bank regarding the number of partial repayments allowed beforehand (usually there is no such limit).
Supercharge your savings
Consider investing in a reputed mutual fund with reasonably good returns meant purely for home loan prepayment. Returns are higher than normal savings accounts while the tax payable is far lower than other forms of savings such as fixed deposits.
The choice to prepay a property loan should be made rationally and be backed by careful planning. Hasty, emotion-driven decisions could seriously hamper your overall financial wellbeing.
This article was originally published on www.thehindu.com dated July 09,2017
