Buying a house for self-dwelling is a massive task. Peer pressure or compulsions from family and friends will often lead one to investing in a house. Real estate observers have even noticed the psychological trends that have a majority thinking that it is “blasphemous not to own a house.”
Even if living under one’s own roof seems a priceless joy of comfort and peace for many reasons, the borrowing aspect of the endeavour brings us close to practicality and more close to reality.
Arranging for the down payment amount, deciding on the quantum of loan to be availed, registration-related expenses, and the expenses that starts at the time of completion, induces nothing less of a nightmare. A scare is of arranging the funds which is not easily available.
The value - b/caps
The home loan would be almost 80% of the value of the house that runs into several lakhs and more importantly runs into several years of repayment, at least 15 to 20 years. And not to forget the EMI commitment that may eat into living expenses. All these are common for home loan borrowers, but the prudence is in managing the loan repayment efficiently.
The lenders are smart enough to frontload the interest component in the EMI that would have less of principal component in the initial years, which would ease as the years progresses. For the first five years, borrowers should settle down with their financial situation by having control over expenses and avoid spending on lifestyle related huge expenditure-driven luxuries.
The next five years should be utilised to start making bullet payments towards the loan that may be arranged through bonuses, incentives or accrued deposits and so on. Any bulk amount received should be utilised to reduce the loan outstanding. With bulk payments either the tenure of the loan should be reduced or the EMI should be reduced which can be done with a discussion with the lending institution.
Think twice
Usually people look to transferring their loans to another bank where the interest rates seem to be lesser compared to original lender’s rate, but unless the rate is not significantly lower, it does not make sense. If the rate is at least 0.50% lower in comparison, one should consider shifting. Otherwise it would become a running-around between lenders and loads of paper work, before the transfer is effected.
On the tax-saving point of view the principal and interest component indeed gets a good benefit under Section 80C and Section 24 respectively of the Income Tax Act. But under the former Section there are several other benefits offered including children’s tuition fee, insurance premiums, provident fund contribution and so on that would offer significant contribution and the principal amount contribution may not be significant. Also, after the first five years of a 20-year-loan, the interest component starts reducing that maybe worth ignoring under the latter Section. But such decisions are subjective by nature that may differ from person to person. However, one may consult an advisor to take those pre-payment decisions.
After 10 years of loan repayment, the strain would be quite daunting. Managing to close the loan in full between the 10th and 15th year (on a 20-year-tenure) would make a compelling case, especially with higher education looming large for students.
Home insurance
One should also not forget to take a home loan insurance which should be purchased at the time of availing the loan itself; it is a very essential protection for family members in case of death of the principal borrower during the loan repayment tenure. The premium payable is a one-time investment that can be added to the loan amount and paid through EMIs.
