With the inflation and rising interest spiraling out of control, most Indians prefer to pre pay their home loans within 10 years even if the loan tenure is 15-20 years. Paying the EMIs for a long period of time burden one’s finances forcing them to pay off their loan much earlier. For instance, if you take a home loan of `50 lakh at 10.5% for 15 years, the total interest cost alone will work out to a whopping `4.95 crore. But acknowledging that since it is a good loan, as you are investing in an assets, which can enable you to get higher returns in future, may divert your attention off that huge sum above.
But it is general to ask the question – should I go for a full prepayment or partial?
If you have a lot of savings or have other sources through which you can pool the entire sum of the loan then full payment is the option to go for.
But, if you do not have such huge pockets, then part –pre payments is what is advised. You can partly prepay your loan either quarterly, half yearly or annually depending upon what your earning and saving potential is.
Remember, the longer the loan tenure, the higher will be the interest rate payments. Do not be an over leveraged borrower. Borrow the money as per your needs and make judicious use of it. Do not consider the bank’s money as yours, since it is your debt until you repay every penny. When you have the burden of such huge loan on your shoulders, it is also advised to cut down on your expenses that might be just for satisfying your wants. With this you will be able to keep additional savings aside to fund your EMIs on time.
Follow these steps:
1.Invest in Recurring Deposits (RD) & Systematic Investment Plan(SIP):
Investing in RDs and SIPs will help you divert your finances towards investments that can gurantee you surplus cash towards the end of their lock in period. Holding a RD in bank will give you a return of 6%p.a , where your lock in period is flexible, whereas holding a RD with the post office will give you a return of 8% although the lock in period is fixed, of 5 years.You can opt for SIPs in debt funds if you are looking at a 3-4-year period. For anything beyond five years, you could look at SIPs in equity-oriented mutual funds.
2.Opt for easily liquidating investments:
If you can earn a return of 4.5-5% in those investments which have an easy liquidating feature, go for it, since these instruments offer twin benefits of returns and liquidity.
3.Save your bonus:
If you have entitled for a bonus this year, congratulations, and save a part of that bonus, to prepay the principle and interest amount. This will lower your burden of EMIs and interest payments and reduce the principle amount considerably.
4.Increase your EMIs:
Most of us think and put in to practice that paying higher EMIs and quickly can help you get over your debt. But, that is a wrong notion. It is much better to pre pay the principle amount or direct your finances towards investing in RDs , SIPs or any other easily liquidating assets to help in prepaying your loan amount.
5.Pay one EMI prior to schedule:
If you pay any amount during the time between the loan disbursement and your first EMI, it will be used for prpaying your loan amount. This also helps in reducing your loan amount.
6.Opt for the home loan that suits you:
Sign up for those loans that will provide you maximum part prepayment options in a year, subject to an overall ceiling of 25% of the outstanding amount. Similarly, many banks offer home-saver loans in which you have to pay interest only on the utilised amount rather than the entire disbursed amount. In such loans, a current account is linked to the loan account. For example, if you maintain a balance of `10 lakh in the current account, you have to pay an interest on `30 lakh even if the actual loan amount is `40 lakh. You can keep stepping up this balance in the current account and withdraw it whenever in need of money. The interest rate is adjusted accordingly.