By the time borrowers turn 40, they should be debt-free, says Balaji Rao
If taking a housing loan is a priority when we are young, once the EMI starts getting relentlessly debited month after month, the thought of reducing that burden would silently nag us. This column will try to address that important issue – can we pre-close our housing loans?
When I first took my housing loan in 1998 the tenure was for 10 years. Though there was a huge mismatch between my monthly income & the EMI outflow (Rs.7,500 p.m. salary against an EMI of Rs.4,600) I was committed to building a house and had availed myself of a loan with great difficulty and saw my dream house take shape. Over the next six years, by 2004, my income too grew due to change in jobs and job profiles which also included earning incentives and bonus. I carefully planned my pre-closure by making “bullet payments” to my housing loan company (apart from regular EMIs) which helped in clearing the entire loan by the end of 2004. Of course, it was not a cakewalk. Being the sole earning member of my family I had to work harder to earn that extra pie, even as my family helped me in the saving venture. We did not get sucked into the lure of owning a car or getting into unnecessary expenses during those years. But it was all worth it. By the time I was 37 years I was able to be debt free from one of the biggest liabilities which was the housing loan. Our first car was purchased after this loan was cleared, which we definitely do not regret.
There can be different views about the need to pre-close housing loans. No doubt there are several income tax rebates that can be availed for the interest and principal payments which reduce the tax burden to a great extent. But personally I always have professed to my clients as also to my friends that by the time an individual turns 40 or 42 years he/she should be debt-free. It is not difficult to achieve this if one follows a few simple rules of taking loans as also pre-closing them.
Many of us plan for loans only after we get married or when we are into our 30s. Given the current cost of flats or building independent houses, the loan amounts have spiralled and the loan tenures have gone up to 20 years. Yet, it would not be a bad idea if the commitment for a house starts by the time an individual reaches 27 or 28 years. It is strongly recommended that planning for a down payment should start as soon an individual starts earning his first salary/income. This would also help in availing oneself of a lesser loan leading to lesser EMI outflow eventually. Once the loan is taken, over the next few years the repayment schedule should be meticulously planned.
It is but natural for us to grow in our careers with opportunities of changing jobs, getting promoted and increase in income, earning incentives and other reimbursements, which could be sizeable when calculated. While such extra incomes are earned it would not be a bad idea to channelise the money as “bullet payments” or lump sum payments towards the loan outstanding. You would be surprised to see how much you would have paid over a period of five years after making such ad-hoc payments.
The wisdom of ‘No pain, no gain' makes us lose something in return for the gain. The simple rules of life have to make us limit our expenses and tighten our purse strings during the prepayment tenure.
With pressure on shrinking shelf-life of working and earning, unstable income due to various economic conditions and other unforeseen events of life, it definitely makes a lot of sense to plan reducing our liabilities early in our lives. Even the prepayment penalties are almost done away with which gives us an opportunity to make it more affordable to pre-close a loan. The feeling of leading a debt-free life is the biggest satisfaction ever, try it.
(The author is professor in wealth management and can be contacted at firstname.lastname@example.org)