Pay home loan with ease

The thought of buying a dream house is exciting. But the burden of home loan repayment assails your mind as you begin to pay the pre-EMI before you move into your home. Even after you have settled in, servicing your loan over the long-term is a huge responsibility — the outflow of interest will dent your wallet and mind in the days of high inflation and rising living costs. So, how does one deal with home loan repayments in a way that is easier on the pocket?

How to save on pre-EMI?

If your house is under construction, or if you have booked an apartment under construction, the home loan will be disbursed in different stages as per the progress of the project. During this period, the bank charges only simple interest for the disbursed amount until the full loan is disbursed (when the construction is completed).

If the project is delayed, your interest outgo only gets worse. Moreover, the money being drained from your pockets as pre-EMI is not reducing your principal loan amount. A pre-EMI paid over a home loan is only beneficial for the tax rebate it brings. However, when compared to its outflow, it is very negligible.

Go for Tranche EMI:

Your banker may not reveal this option to you, but it is in your interest to know about this option. Assume that you have a home loan of Rs 30 lakh and you have booked an apartment whose builder promises possession in 2017.

Also, assume that the payment schedule for the balance amount as per your construction agreement is Rs 1 lakh every alternate month, starting from January 1, 2015. By December 2015, the bank would have disbursed Rs 6 lakh and you pay a pre-EMI of approx. Rs 36,000 (at 10.5 per cent interest rate). Moreover, by 2017, this amount is tripled, with compounded interest.

Instead of paying pre-EMI, you could opt for tranche-EMI option. Under this option, with the release of the first instalment, you start paying EMI for the entire loan. You may wonder why should pay interest for the undisbursed amount.

However, in effect, it is not going to tax you any additional amount, but will instead save you from the pre-EMI outflow. Your loan tenure is all the same and the only difference is that you start your EMI early even before getting the full loan and repay the loan quicker.

Many people fail to calculate the pre-EMI outflow and do not realise the monetary loss arising from it. Tranche-EMI is not a popular option simply due to lack of awareness.

When to part pay or pre-close

Once you start paying the EMIs, the focus shifts to completing the loan repayment in a shorter period than scheduled. The common dilemma of all borrowers is: When should I close it? Moreover, how should I make part-payments? While it all depends on your finances and need, there are some time-tested ways of accelerating your loan closure.

Making part pre-payments towards your loan is always a great idea as that can bring down your total interest outflow towards the loan. You may choose to prepay the loan from the bonus that you may have received or any other income you get other than your savings.

There are no bank restrictions for making part pre-payments; however, some banks insist on a minimum payment equal to three to six EMIs and cap the number of part-prepayments to three a year. In recent times, most banks have lifted these restrictions.

A note of caution: 

While making part-prepayments may be a good idea, never use your savings or contingency funds to do it.

Pre-close your loan: 

Pre-closing your home loan may not be always a good idea as the  home loan compensates for a part of its outflow through the tax sops it attracts. The principal paid on home loan can be claimed up to Rs 1.5 lakh under Section 80C and the interest gets rebate up to Rs 2 lakhs under Section 24 of the Income-Tax Act.

Therefore, with a home loan, you need not run around in March for making investments in tax savings funds.
If you have sufficient funds at your disposal, gathered from your own resources (and not any other loans or debt), going ahead with the pre-closure of home loan is desirable in one way — you can enjoy the comforts of owning a debt-free home. If it is your second home, you can enjoy the undiluted rental income from it. There are no pre-payment penalties if you foreclose your home loan ahead of tenure.

Whatever the repayment strategies you choose, remember, a good repayment safeguards you from debt trap and keeps your credit score in good health, enhancing your credit standing.

(The writer is the CEO of BankBazaar.com)