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An easy way to repay your home loan
Abitha Deepak, BankBazaar.com | April 20, 2009 12:01 IST
Though it is advisable to increase your equated monthly installment to reduce your home loan tenure and help you repay your loan faster, you still need to keep it at comfortably manageable levels to be on the safer side.
Why is this the case you may wonder. A valid argument for you is, I would rather save on the huge interest cost by managing to pay a higher EMI, rather than pay a lesser EMI and face a long loan tenure.
There is a solution to get the best out of both the situations. The solution is to prepay.
Here are some reasons that indicate why you should adopt this strategy.
a. Ideally banks offer loan amounts up to a limit of around 50 per cent of your income. This does not mean you should utilise the entire limit available.
b. A long term loan like a home loan is a debt that is part of your budget every month. If you invest too much into it, there might not be adequate funds to manage a huge list of other expenses that will tend to accumulate with time. For example, you need to make allowances for future expenses like children's education, emergency funds for a job loss or the loss of one income in a situation where two people have taken a joint loan.
c. There might be spikes in interest rates. In such a scenario usually banks will increase the loan tenure in order not to put the borrower in a tight spot by increasing his EMI. In such a scenario if you can manage a slightly higher EMI you can request the bank to adjust the EMI, instead of extending your loan tenure.
d. On the positive side, when your income graph soars with time, as it is bound to under normal circumstances where promotions and job changes take place, you can always choose the prepayment route. It is best not to commit a higher sum that will burn a hole in your pocket, rather it should be the other way around where you can actually control the repayment pattern of your home loan.
e. A home loan may not be the only debt you incur. You might end up taking an education loan for your children or a personal loan for some other purpose. Your debt liability will be taken into account before banks sanction such loans. At such a juncture you will be in a position to leave enough room for one more loan, if need be. This could enable you to invest in a second home also in the long run.
f. Last but not the least, it is very easy to be stressed if some unexpected situation upsets the apple cart. You should have contingency plans in place to avoid your finances toppling like a house of cards leading to undue stress. Your life is something to be enjoyed and cherished, so don't entangle yourself in a web of debt and spoil the fun.
The author is Head of Content & Research at BankBazaar.com
BankBazaar.com is an online marketplace where you can instantly get loan rate quotes, compare and apply online for your personal loan, home loan and credit card needs from India's leading banks and NBFCs.