Smart ways to manage your home loan

After the festivities are over, and with the dawn of a new month, a new realisation comes home. For the fortunate few, it is a reminder to fund your bank account as the loan EMI is due after a week. For others, the money simply flew out of the bank account.

It is time for us to act like the fund manager of a mutual fund or investment fund. Taking informed decisions to manage the asset that we call home and the liability that we call housing loan. By being prudent, you can get high “returns” in the form of saving on interest outflow.

HOW TO MANAGE YOUR FUND

As a fund manager of the house, one has to find ways to maximize the benefits of the cash flows. Make a list of all the loans and savings/investments that you have made. Do you This can typically be seen with your endowment insurance plans, your EPF and PPF, the postal deposits, sometimes-even ULIPs. Why should you be investing in something when you are paying higher interest to somebody else? It is better to close all or most of these lesser returns savings/investments and divert the funds to close the home loan.

Care should be taken to replace an endowment insurance plan with a term plan of higher cover. Your employer and your EPF officer will allow withdrawal of funds from the EPF account for buying and closing the loan of a house. The PPF is not so flexible with letting go off your money. ULIPs and postal deposits can be closed only after the stipulated 3 years of lock-in.

Now let us look at the options in more detail. The best part is that the options do not in any way add to your existing budget.

PARTIAL PRE-PAYMENT

This is the easiest way to close a housing loan faster. The method is to make use of any one-time income like a bonus, salary arrears, gifts from friends/relatives, any windfall gains from shares, property sold, deposits closed, tax saving investments maturing, closure of savings that are giving you lesser returns than the housing loan, etc to partially close the housing loan.

The effect is that the one-time payments help to reduce the principal balance in the loan. And when the EMIs continue, they have lesser of the principal to cover. So the same EMIs need a lesser time to close the loan.

Banks generally allow partial pre-payment starting from 10,000 rupees. There are no charges for partial pre-payment of housing loans.

SWITCHING TO A LOWER RATE

The interest rates are in a rising trend. There are times when the interest rates will start going down too. Based on the interest rate reset period, different banks will reduce their rates at different times. If the reset interest band of your lender is a wider band, you may be at a higher interest rate for a long time after other banks have started reducing their rates.

Switching to a lower interest rate will shave off a few years from your housing loan. However, you must avoid jumping banks because of low interest rate differences. This is because there is a charge for switching loans, i.e. pre-payment penalty, which the RBI has been stressing, should be removed from the system. While some banks have already done away with it, some still charge if you do not pay from your own sources. However, it could be a matter of time till the pre-payment penalty totally removed from the system, further easing the cost burden for the borrower.

Do remember that property verification and other legal paperwork will have to be done afresh in the case of a loan transfer. Also, for a loan transfer to be effective you should have a clear track of having cleared all the EMIs on time.

INCREASING THE EMI

This is another option to close the loan faster. If you can spare a portion of an increment to increase the EMI, considerable saving could be made. For example a 30, 00,000-rupee loan for 20 years will need an EMI of 28,950 rupees. If you can spare an additional 2,300 rupees per month, the loan can be closed in 15 years.

The EMI can also be increased by making use of money that was going into an endowment insurance plan or a recurring deposit in a post office.

Increasing the EMI can be done at any point during the tenure of the loan. There are generally no charges for increasing the EMI.

CONCLUSION

Only after closing the home loan does one really become the owner of the house. Closing the loan as soon as possible not only relieves the mental strain of carrying a debt but also releases more money into the family budget.