Prepaying home loan might seem to be a difficult and tedious task for a fixed salaried person, but proper planning and a little bit of financial discipline can help you achieve this. While many borrowers consider home loan prepayment as a top priority financial exercise, others believe normal monthly EMIs give them tax saving. Here they forget that it deprives them of the HRA component in their CTC. Plus, you can never forget the burden of home loan in your lives. One of my friends, after paying the first installment of his home loan said, “Looks like someone has tied chains to my feet and I am asked to pull an elephant.” The statement, though ironically said often holds true for many middle- class households in India. One has to make financial compromises, now and then. Repayment of the home loan before the estimated time not only gives financial freedom but also adds to family happiness and content. However, before you start the prepayment process, you should ensure that you and your family are financially secure. You must keep aside an amount that equals 4 -5 EMIs which will help you in the case of an unexpected job loss or a job change. You must also have an exigency fund for health and other emergency needs. Plus, your children’s education needs should also be taken care of. Clearly, your home loan prepayment plan in no way should affect these.
Let’s have a quick look at some tips that can help you repay your home loan before its actual tenure.
• Start making partial payments whenever your pocket allows
The sooner this practice should is adopted, the earlier you can finish off your loan. So, if you are planning to buy a brand new LED this festive season, you need to postpone this idea for some more time. Instead, try to deposit festival bonus in your home loan account. Partial payment can also be done with your maturing fixed deposits and other investments. You must check all your investments and whether they are paying you more interest than what you are paying to your home loan repayment. It is estimated that average loan tenure in India is 7 to years, therefore, one should not leave any opportunity of prepaying the loan.
• Increase EMI amount with increase in income
At the time of loan approval, banks fix the EMI amount to 40- 50% of your take home salary. But as years pass by and your salary increases, the EMI remains the same. To maintain this balance, one should keep tweaking the EMI structure with increase in income.
• When is the right time to prepay home loan
You must be knowing by now that your lender charges mostly interest from the initial EMIs. The amount that goes for principal repayment is almost negligible. Hence, it is advised to prepay your home loan in the first 7- 8 years of your loan tenure. In this way, you will be able to save a good value of interest amount. However, if there is more than one loan running simultaneously, you should first aim to pay off the loan with more interest.
In a nutshell, it is always beneficial to pay off your home loan any time before its expected tenure. Until the last couple of years, banks and other financial institutions were charging a significant amount as a penalty for closing home loan account before time. But, RBI has waived of this rule in June 2012. So, now you won’t be paying any penalty to the lender if you wish you close your loan account before time.