Provided below are some examples of what can be done to repay a home loan early.
Homeowners do not have to wait for some sudden influx of cash in order to be able to prepay a home loan. Regular payments of additional small sums over a period of time can also make a significant contribution towards prepayment of the home loan. This concept was used by a couple in Nagpur. The joint yearly income of the couple was at the time of taking the loan was around INR 15 lakhs. The EMI for the home loan was around INR 20,000 while the rent for their accommodation was around INR 19,000. The household expenditure each month totaled to around INR 30,000. Each year, the couple paid something extra towards the home loan.
A few years after taking out the loan, the couple purchased a commercial property in Mumbai suburbs and another residential property in Bangalore, and both of them were funded via their savings and sale of some land and another property in Nashik owned by the family, and not via a new home loan. Currently, these additional investments provide the couple with rent income of INR 50,000 per month which is used partly to make prepayment of the home loan.
Before purchasing their first home in the city of Bhopal, a married couple (both held managerial positions at MNCs) had made the plan to repay an INR 30 lakhs home loan that they would take before its 20 years tenure formally ended. The couple did not waiver from their plan and eventually prepaid the entire home loan in just over 4 years, while also ensuring that their cash flows were not stifled. They used their incentive of over INR 70,000, the annual bonuses totaling to nearly INR 3 lakhs, and the surplus monthly savings to regularly make part payments towards the loan. This process helped the couple save approximately INR 24 lakhs in interest.
It is important to note that the above scenario is not a unique one. Discipline and proper planning can make it easier to achieve the target.
Before purchasing a house, Mr. Shah of Ahmadabad had planned in advance and arranged for some significant amount of funds as savings. Subsequently, he took out a home loan for INR 18 lakhs. His plan was to repay the loan as quickly as possible. Shah did not use all of his savings to pay for the house. Instead he used the savings to make part payment of INR 9 lakhs through the loan tenure. Individuals who have not made as efficient a plan as Shah should not be dejected. It is also possible to liquidate old investments to make home loan prepayments.
People who do not have any lump sum funds or any significant savings can also make prepayment of the home loan. This can be done by increase the EMI amount every year. Thus, for a home loan of INR 40 lakhs, with tenure of 20 years and a 9 percent interest rate, it is possible to repay the loan in around 100 months by increasing the EMI amount by around 14 percent each year. In case increasing the EMI amount by 10 to 15 percent is difficult for home loan takers, then it is important to make sure that the hikes in rates do not go beyond the loan term. Do not extend the home loan tenure when there is an increase in the interest rate; instead you need to maintain or hike the EMI amount. If there is a decrease in the interest rate, then go for a shorter loan term instead of decreasing the EMI amount. This will assist in faster repayment of the home loan.
One of the main aspects of successful prepayment of home loan is the direction of lump sums of cash towards the loan prepayment. Mr. Talwar, a businessman from Delhi, used this approach to decrease the total outstanding on his home loan from INR 40 lakhs to INR 20 lakhs.
Talwar received arrear payments of INR 12 lakhs and INR 8 lakhs from his customers in 2 tranches. This lump sum money was used by him to decrease the overall burden of the home loan. It may be noted that this choice to part prepay the home loan meant that he had to postpone his purchase of a luxury car. Thus, a property loan of INR 40 lakhs, with a 15-year tenure, and a 9 percent interest rate, can be repaid in full in around 7 years by making home loan prepayment of around 4 lakhs after every 10th/11th EMI while ensuring that the EMI remains constant.
It is a fact that prepayment of home loan can help ensure a stress free life and peace of mind. But it is also important to remember that prepayment should not be at the cost of other life goals. It is necessary to check out if the investment in property is draining your savings and other resources and then accordingly take a call on whether or not to sell off the property.
The problem of taxation
Some people tend to maintain their home loan account in order to be able to get tax benefits. It may be noted that under Section 80C of the IT Act, there are tax benefits of up to INR 1.5 lakhs on the repaid principal and around INR 2 lakhs in the paid interest. Financial experts have diverse opinions on this aspect of home loans. Most are of the opinion that the home loan prepayment can be structured in such a way that the amount needed for tax gains is retained as home loan.
There are many others who argue that the tax amount that is saved tends to be lower as compared to the cost of interest. Hence, avoiding prepayment of home loan so as to enjoy tax benefits is not a correct strategy. Also, we have to take into account our varied investments and liquidity. The sacrifice of current investments and liquidity so as to be able to make home loan prepayments may force us to opt for more expensive loans in the future for taking care of financial emergencies.