Skip to main content

Some sure-shot methods that can help lighten your home-loan burden

Prepay Your Home Loan - The Smart Way


   PAYING off that home loan through monthly EMIs (equated monthly instalment) is perhaps the biggest financial commitment that an individual can make in his life. And spiralling property prices coupled with hardening interest rates are not making that burden any lighter as borrowers stare helplessly at EMIs eating into a major part of their take-home salaries.


   No wonder, most people are forever looking for ways to prepay a part of the loan as early as they can. In fact, many bankers will tell you that most Indians prefer to pay off loans — even if they have a tenure of 15 or 20 years — within 10 years. Though many a time the aim may be to buy a bigger house, the fact remains that most people prefer to prepay their home loans as they abhor the idea of a huge EMI sitting on their monthly bills.


   However, making a case for early repayment or prepayment is a difficult proposition. One the one hand, a housing loan helps you to create your own space and, on the other, it also offers you tax breaks — both for paying off the interest and principal payment. But a home loan comes with a huge price tag. For instance, if you take a loan of 50 lakh at 10.5% for 15 years, the total interest cost alone will work out to a whopping 4.95 crore. However, you cannot categorise a home loan as a bad loan, as it helps you invest in a property which may fetch you higher returns in future. Nonetheless, you can significantly reduce the interest cost by prepaying the loan — provided, you have some surplus in the bank.

Part or Full Prepayment?

If you plan to prepay the housing loan you have two options. Under the full prepayment option, you need to cough up a huge sum so as to be able to pay off the dues. If you don't have such a huge kitty, you can consistently make part-prepayments, say every quarter, or a year depending upon your comfort level. This will reduce the principal amount and bring down the outstanding loan amount and the net interest outgo. The longer the loan tenure, higher the amount of interest repaid. Banks will usually cap your maximum EMI at around 50% of your current monthly income. But you should ideally borrow only up to 40% of your take-home salary so that you have some leeway to pay off dues ahead of time.

Plan Your Prepayment In Advance:

You should not be an overleveraged borrower. You should have spare cash for disciplined investment. Finally, you may have to cut down on your lifestyle for the first few years if you have to keep aside additional money. But if you want to pay off your home loan faster, then you have to follow certain steps.

Use SIPs & RDs As Backups:

This is a disciplined form of investing your surplus cash. The idea is to build a sizeable corpus over a period of time. You could open a recurring deposit (RD) with a bank or a post office. In case of banks, you can earn a return of around 6% but you have the flexibility in choosing the tenure of the RD. The post office, on the other hand offers 8% on RDs but they come with a lock-in of five years. Alternatively, you could look at 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. Unlike an RD, a borrower can stop his SIP half way if he is unable to cough up the money. But you should strictly look at SIPs in debt products and liquid-plus categories.

Go For Easy-Exit Instruments:

It's crucial to lock into instruments with an easy-exit clause. Liquid funds and liquid-plus funds can come in handy to park your short-term gains and help you earn a return of 4.5-5%. These instruments offer twin benefits of liquidity and returns.

Save Up Part Of Your Bonus:

You could earmark a certain portion of you bonus or the entire bonus to partly prepay the housing loan. This will bring down your principal amount and bring down the interest costs significantly. However, use the entire bonus towards the home loan repayment only after meeting the expenses and investment needs for your long term financial goals. The logic is that a home loan is a good debt because it is used in creating an asset and also offers tax benefits on the loan.

Step Up Your EMIs:

This is a common option exercised by borrowers. But it's not the best way to pay your loan faster. If you are paying a lump sum amount, it has a direct impact on the principal amount. It simply means repaying the principal back to the lender and it is straight forward. Even if you pay by way of increased EMIs, after the interest cost (which is constant) the balance will go towards servicing the principal. But then, this is not as clear cut as directly paying off the principal. If you have got a salary hike, it is better to park the surplus money in an RD/SIP/liquid fund as stated above and pay off after earning some return on it.

Pay One EMI Before Schedule:

Usually there is a month gap between the loan disbursement and the first EMI. Any payment you make in this period is directed towards payment of the principal and reduces the overall interest cost.

Choose A Home Loan That Suits Your Needs:

If you are clear about settling dues at the earliest, then look for a scheme that allows maximum part prepayments in a given year. For instance, some banks allow such payments once a year whereas some banks allow payments 3-4 times 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.

Popular posts from this blog

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now