Getting a home loan sanctioned is a long process. A number of factors play a major role in determining your home loan approval, the home loan amount, your EMI amount, and the tenure duration. After you take a home loan, repaying it at the earliest always stays at the back of your mind. As soon as you get any extra income, whether it is in the form of a hike, promotion, or even a new job that pays a higher salary, the first thought that comes to mind is to repay the home loan faster. That way you have to pay a lesser interest amount. But before you do, there are a few things you need to consider carefully.
Getting rid of your liabilities as soon as possible sure is a smart thing to do. But before you go ahead with the prepayment documentation and other formalities, ask yourself these questions:
- How old is the loan?
- How much tax are you saving?
- Is it difficult to repay the loans in your present situation?
- How much return can you get by investing your surplus cash in a good instrument?
- How much will the return from a new asset be, if you invest in that instead of in repaying your loan?
Even if you do not have clear answers to all these questions (especially the last 2), asking yourself these questions will help you in going about your home loan prepayment. Simply getting an increment or an additional source of income shouldn’t let you rush into repaying your loan. To ensure nothing goes wrong, here is a list of Do’s and Don’ts that you should keep in mind while considering prepaying your home loan.
- Choose Your Loan Wisely: Although this is a step to be careful of while initially applying for the loan. This is especially true if you are planning on making a prepayment at some stage. For example, if you are in line for an appraisal and you know you are going to increase your EMI amount to reduce your tenure, you should choose a bank which has a hassle-free procedure rather than one that charges an extra fee for any form of prepayment.
- Know Your Budget: Choose the loan amount after considering your needs carefully first. Whether you are about to purchase an apartment or an independent house, the amount of money you will require changes considerably. If you take a greater amount than you need, repayment might be a huge problem. On the other hand, taking a lesser amount than you anticipated might leave you financially strained in the end.
- Pay Steady EMIs: When you choose to prepay a loan you get 2 options. You can either reduce your EMIs, or you can reduce the tenure. Whichever option you choose, your goal should be to pay steady EMIs, an amount you will be comfortable paying till the loan is repaid in full. Ideally, your home loan amount should not exceed 50% of your salary.
- Prepay as Early as You Can: The idea behind a loan prepayment is to reduce the amount of interest you pay and consequentially your financial burden. EMIs are structured in such a way that during the first phase of your tenure, the EMI consists mostly of interest. Hence, the sooner you prepay, the more you save. So if at all you plan to prepay, try doing it at the beginning of your tenure rather than towards the end.
- Carry all Relevant Documents: Once you have considered every aspect involved in preparing a home loan, carry all necessary documents, most importantly a photo ID proof issued by the government (license or PAN card) and your cheque book. Also, keep in mind that apart from making the prepayment, you also need to pay simple interest for the month towards which the principle is being prepaid.
- Forget to Calculate Benefits: Remember to calculate the returns you can get from investing your excess cash in other financial assets compared to the returns you can get from a loan prepayment. You will realize that a home loan prepayment is not the best alternative in each case.
- Prepay the Entire Loan Amount: Rather than repaying the entire loan amount at the first opportunity, you should consider partial repayment of the loan. If the interest amount you save is less than the returns you can receive by investing in other financial assets, you should let the loan tenure continue the way it initially was.
- Overlook the Tax Benefits: Having a loan opens you to a variety of great tax benefits and attractive rebates on both the interest and the principal components. If that’s not a good enough reason for you to let your loan tenure continue, then nothing will be.
- Ignore the Payment Acknowledgement: A lot of stores and franchisees stress the importance of a purchase receipt. This is because an acknowledgement officially records the purchase or transaction and both parties have proof of it. Getting a payment acknowledgement is essential to have written proof that you have made a prepayment transaction. Also, don’t forget to get it stamped and signed by an authorized bank representative.
- Forget to Collect Your Unused Cheques: More than anything, collecting unused cheques is a precautionary step. If your cheques are lying unused at the bank there is a risk of your cheques being used or misused by a third party. Collect them to ensure that there is no misuse under your name.