In order to ease the burden of EMIs, you can plan the repayment of your home loan well in advance and it also provides you various benefits.
Buying your first home is a big financial decision. A hasty decision can easily ruin all your financial goals in life. So, it is always advisable to take a planned step and proceed further with caution. Usually, the first home buyers take the help of home loans, which involves a long-term EMI repayment commitment.
Long-term big liabilities like home loans often stretch up to 15 to 25 years for a majority of borrowers. Even if you want to pay it off as soon as possible, you are often unable to do so — either due to lack of awareness or shortage of funds. However, be rest assured as with a small increase in EMIs, you will be now able to repay your loan faster, which works better in a falling interest rate regime.
Increase your EMI
It will not only assist you in getting rid of your liability faster but will also help you to save big on the interest outflow. Usually, the longer the loan tenure you opt for, the higher the total interest you pay on your loan. However, as the loan amount is often big, most home loan borrowers stretch their budget while buying a home. Therefore, it becomes difficult to churn out some extra in the initial years.
How much EMI should you pay per month?
Early planning can help you to estimate how much loan you can afford and accordingly, you can start searching for a property. Usually, banks allow an EMI of up to 60% to 70% of net monthly income (after adjusting all financial obligations), while considering the loan application. For example, suppose your net monthly income is Rs 50,000 and your age is 30 years. Usually, the bank would allow an EMI up to 60% of 50,000 (i.e., Rs 30,000). If the rate of interest is 8% and you want to take the home loan for 30 years, then, you will be eligible to get a loan of up to Rs 68 lakhs, approximately. Considering this loan eligibility, you can start searching for a home that falls within your financial capacity.
Planning your home loan repayment can help you to save money towards the down payment, which amounts to around 10% to 20% of the value of the property. Early planning of home loans can allow you time to explore the terms and conditions of various lending institutions and banks and select the best lender. While the early planning of loans is crucial for first-time home buyers, it is equally important to repay your home loan on time. So, let us look at some ways to repay your home loan easily.
Should you prepay your home loan?
Bonus income can significantly reduce your home loan EMI obligation, or you can plan to repay your home loan early. Most salaried people get a bonus during the year. Instead of spending it completely, use it for prepayment of your home loan amount. Banks do not charge any penalty on the prepayment of a floating rate-based home loan. Any lump-sum income from other sources can also be used towards the payment of your home loan, to reduce your repayment obligation.
What is the best home loan tenure?
“For easy repayment, opt for the maximum permissible period, so that the EMI outgo will be easy. Also, at any point in time, if there is any shortage of income, you may not end up defaulting on the EMI. A few lenders even allow a repayment period after retirement, at reduced EMIs, considering pension availability, One can get a higher period of loan even after 60/70 years of age, by clubbing the income of one’s son/unmarried daughters or wife as co-borrowers.
Make partial prepayments
Go for partial prepayment, if you have some surplus funds in hand. With floating rate home loans, there is no penalty on partial prepayment. Making partial prepayment brings down your outstanding instantly.
While some lenders have a restricted number of partial prepayments, some allow any number of partial prepayments. Hence, check this with your lender first. You can make prepayments with small gains like a bonus, incentives, and arrears.
Know the tax benefit
The income tax benefit is limited to Rs 2 lakh for interest payment on home loans in one financial year. Experts say, especially those in the higher tax bracket, can effectively bring down the cost of the loan. People in the 20 percent income tax bracket can save around Rs 40,000 in a year while those in the 30 percent bracket can save around Rs 60,000 on this interest payment.
Why you should invest early for a home loan
According to experts, one should start investing early in one’s career, so that you can build a sufficient corpus, for buying your own home. If you have a big corpus while purchasing a home, then, it allows you a better cushion against liquidity crisis during the loan repayment period. It can help you to take a loan for a shorter period and avoid defaults on the loan repayment.