It's not just the real estate prices that are rising. Even the rates on home loans have been going up, compelling potential home buyers to reconsider their decision to purchase a property.
But existing borrowers have only two options to deal with the soaring interest rates. One is full prepayment of home loan and the other, partial prepayment.
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 a part-prepayment, say every quarter or a year, depending on your comfort level. This will reduce the principal amount and also the outstanding loan amount and net interest outgo.
For partial prepayment, you should have spare cash for disciplined investment. You can opt for recurring deposit with a bank. SIP is another option, which may give higher returns but is subjected to the vagaries of the equity market.
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 with a bank or a post office. In the 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 period of five years.
Alternatively, you could look at SIPs in debt funds if you are looking at a term of 3-4 years. For anything beyond five years, you could look at SIPs in equity-oriented mutual funds.
Look at financial instruments that offer easy exit routes. Liquid funds and liquid plus funds are good avenues to park funds for a short-term. Such funds will earn you a return of 4.5% to 5%. These instruments offer the twin benefits of liquidity and returns.
You could earmark a certain portion of your bonus or the entire bonus for partly prepaying the housing loan. This would bring down your principal amount and bring down the interest costs significantly.
PREPAYMENT PENALTY
Most banks have removed the prepayment penalty even when the housing loan is fully prepaid. But the requirement is you have to pay off the outstanding amount from your own source of funds. You have to furnish proof to the bank that the funds are your own. Switching lenders will attract a penalty of 2%.
