Pre-paying home loans need not be expensive if you choose to do it in parts. Vidyalaxmi offers you some helpful suggestions to ease your burden.

ACCORDING to data maintained by housing finance companies, the average tenure of a home loan is seven years. This is partly because many borrowers choose to pre-pay their loans as they upgrade their homes. Pre-paying loans when you choose to relocate is expensive. Part of this expenditure can be avoided if you accelerate your repayments by pre-paying only in small parts, which is allowed by most lenders. Making a case of early repayment is a difficult decision. First, you should not be an overleveraged borrower. You should have spare cash for disciplined investment. And then, you may have to cut down on your lifestyle for the first few years if you have to dole out additional money. But if you want to pay off your home loan faster, then you have to follow certain steps.

DO A SIP OR AN RD

This is a disciplined form of investing your surplus cash that you have at your disposal. The idea is to build a sizeable corpus over a period of time which could be a function of your income and requirement. You could open a recurring deposit (RD) 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 of 5 years. Alternatively, you could look at SIPs in debt funds if you are looking at a term of 3-4 years. For anything beyond 5 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 money. But you should strictly look at SIPs on debt products and liquid plus categories," explains Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisories.

LOOK AT EASY EXIT INSTRUMENTS

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

EARMARK A PART OF YOUR BONUS

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. However, use the entire bonus towards the home loan repayment only after meeting the expenses and investment needs for long-term financial goals. The logic is that home loan is a good debt because it's used in creating an asset, plus you get tax benefits on the loan.

STEPPING UP YOUR EMI

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 lumpsum 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 EMI after the interest cost, which is constant, the balance would go towards servicing the principal. But then, this is not as clear-cut as directly paying off the principal," explains Mr Sadagopan. If you have got a hike in the salary, it's 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 principal payment and reduces the overall interest cost," says Amar Pandit, a certified financial planner.

SCHEME THAT SUITS YOUR NEED

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 such 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 Rs 10 lakh in the current account, you have to pay interest on Rs 30 lakh even if the actual loan amount is Rs 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.

PLAY YOUR CARDS RIGHT

i) Don't use the entire liquid cash to pre-pay the loan. Keep at least 20% of the funds as reserve for unforeseen contingencies.

ii) Make extra repayments right from the beginning. It reduces the overall interest costs of the loan over the long term. Settle expensive debts such as a credit card or a personal loan before pre-paying your home loan. These debts come with a higher price tag and don't offer tax benefits.

iii) Check the pre-payment penalty clause with the lender. Usually, banks do not charge penalty on part payments and full pre-payments if the money is forked out of your own savings. You have to provide the necessary proof to convince the lender. If you are switching lenders, then there is a pre-payment penalty, along with the switching charges as mentioned in your home loan agreement.

iv) It makes sense to cap your home loan EMI at 30% of the salary and invest the balance 10% in easy exit instruments such as debt funds, liquid funds, etc. This would help you build a sizeable corpus over 3-4 years and pay off a part of your debt.

Source: http://epaper.timesofindia.com/