When saving for a home loan, plan on increasing the down payment over and above the limit that needs to be paid
RBI recently brought in a new ruling effective from February of this year to curb property values being inflated. Accordingly stamp duty, registration and other taxes like VAT and service tax will be excluded when property value is considered for determining the loan amount. This means the borrowers need to pay it as part of their down payment! This news should not be taken in the negative light by the borrower. It’s actually a blessing in disguise. Why? The more the down payment the lesser the loan amount and hence lesser the interest cost. In fact, a borrower should strive to increase the down payment as much as they can afford to save on interest cost and the time to repay the loan, helping him become the complete owner of the house without having to wait it out for 20 or more long years.
Timing the purchase of a property to land a good deal at the right time
It is a good idea to choose a time when builders try and promote the sale of property with attractive discounts. This typically happens during the period before interest rates begin the downward trend, when builders like to quickly sell out slow moving projects that had accumulated during a high interest regime. In fact the time now is ideal as the exact scenario described above is unfolding now, with interest rates expected to decline anytime in the next few months!
Try and time your loan purchase when interest rates begin their downward trend
You should try and take a home loan when interest rates begin the downward trend to cash in on the falling rates, which will help you lower the interest cost of your loan.
Partial prepayments can decrease the tenure closing the loan early
You can use part of your savings to prepay the loan thus reducing the tenure. If your loan amount is well within 40% of your income, you could easily set aside money to prepay at regular intervals.
– From your savings try and set aside 10- 20 per cent of your income for home loan repayment
– Accumulate this amount every three months and make a quarterly prepayment
– With most HFCs and some banks having done away with pre payment charges, this is a good incentive to prepay. Even if there are pre-payment charges, please note most banks do not charge a penalty for partial prepayments up to a certain limit. Verify these details before you plan your loan prepayment and make the most of the specifications for prepayment.
How you can move to a better living space while still repaying a current home loan!
Typically a home loan has a very long tenure and the cycle is filled with highs and lows in interest rates, which can easily stretch the loan to several years unless you actively follow some the steps detailed above to repay your debt quickly. After the first 5 or 6 years of your home loan, you might want to shift to a bigger house or a better location as your needs dictate.
In such an instance, you can post a discussion with your bank, sell your existing home for a nice profit, and repay the remainder of your loan. You can then shift to a bigger home with a new home loan and a higher down payment.
On an average it is best to restrict your loan tenure to 10 years if you opt for a 20 year loan. Factor in your career prospects, increase in passive income, spouse’s income, accumulated savings etc. and optimize the benefits from these factors to close out your debt. Living debt free should be a personal goal that you should strive for especially when the years roll by!