If you have a fixed salary, it is understandably a laborious task to prepay your home loan, however, with apt planning and fiscal discipline, you can easily achieve this. While most of the borrowers give high priority to the home loan prepayment, others are of the view that normal monthly EMIs help them save tax. Here, they forget that it bereaves them of the HRA element in their CTC. Plus, the burden of the loan stays with you throughout your life.
One of my colleagues Akash Chabra recently paid his first installment of his home loan. He said that he feels someone has tied chains to his feet and he has been asked to pull an elephant. Well, the statement of Akash holds true for most of the Indian middle-class families. You have to make financial compromises from time to time. But, if you are prepaying your home loan before the set time, it certainly adds to your family happiness and content. However, before you start off your prepayment process, making your family financially secure should be your top priority, you can do this by keeping aside some significant amount in case you have to face some financial emergency.
Ideally, an average home loan is of 7-8 years, so make sure you have made the most of each opportunity to prepay your loan. Allow me to discuss some smart tips to prepay your home loan.
Save Yourself From Pre-EMI Plans :
For a particular project, both your bank and builders will offer you various pre-EMI plans. Well, according to this, you only have to make a payment for the interest component as long as the project is under construction. Once you relocate to the new home following the completion, your regular EMIs interest + principal repayment will begin. You should opt for the pre-EMI plan only when you have insufficient funds as in this case, your actual loan doesn’t reduce. When you pay regular EMIs from the start, it will bring down the principal amount and it is also beneficial in the longer run.
Use The Facility Of Loan Overdraft :
You can make the most of the numerous fiscal services in the market to prepay your home loan, home loan overdraft is one such service. After making your monthly EMIs, if you have enough income, then you go for a home loan overdraft service. As per this service, you have the facility to deposit the amount in your loan account with the freedom of withdrawing it as per your desire.
Make The Most Of The Increased Disposable Income :
As per the financial experts, you should maintain your income-to-debt ratio if your disposable income increases. In layman terms, this means that if your income increases, you should also increase your EMIs to payoff your loan early. This will also prove helpful in controlling extra expenses when your salary increases. If there is a decrease in EMI, it will only influence the interest component whilst keeping the principal intact.
Channel Your Windfall Gains :
If you are looking to pre-pay your home loan, make sure you channel your windfall gains along with the one-time payments for the loan prepayment. One-time payments may comprise of incentives, yearly bonuses, etc. As far as windfall gains are concerned, they may come in the form of unforeseen profits, winning a lottery, etc. With the help of these funds, you are able to make partial bulk payment, thus significantly reducing your loan.
Save To Meet The Pre-payment Target :
Go for regular monthly saving in order to make some bulk pre-payment of your home loan. For instance –If you have plans to prepay Rs. 60,000 next year, then make sure you start saving Rs. 5,000 every month. Recurring deposit is one of the great options for such savings. With the help of this prudent payment plan, you can easily mobilize your monthly savings towards an annual prepayment which will reduce both your term and EMI payments.
Knowing The Right Time To Prepay The Loan :
You must be aware of the fact that during the initial years of a home loan, interest efflux dominates the principal payment. While at the end of the home loan term, principal payment is more than the interest payment. Therefore, make sure you prepay your home loan in the initial 7 years of your loan. Before you take any final decision in this regard, make sure you have done cost-benefit analysis at your end.