Saturday, April 14, 2012

Home loan: Borrow smartly to manage EMIs

Prospective homebuyers must put in some diligent homework before finalising on a lender. Selecting the right lender is as crucial as selecting the right property itself. Trying to switch the home loan to another lender at a later date is a cumbersome process. So, borrow smartly. 

First of all, borrow as little as possible. Even if your salary permits a higher loan amount, do not stretch your finances unduly. In case of an upward interest rate movement, the EMIs could increase significantly. In these times of economic uncertainties and high inflation rate, set aside a minimum of 15 percent of the property price even before approaching the lender. This forms a cushion in the event an increase in rate. 

Deciding between fixed and floating options is tricky. While fixed rate loans assure the borrower of constant EMI payments, they are a few percentage points more expensive that floating rate loans. Loan packages that are fixed for a few years and floating for the rest of the tenure are a good option for new borrowers. 

Make regular partial prepayments. Save regularly, say Rs 4000, every month in a recurring deposit. At the end of a year, you make a prepayment of Rs 48,000. Prepayments no longer attract penalties and you can reduce your EMI burden by making periodic prepayments. Make use of any windfall gains to make prepayments. 

Home loan

Compare the returns you will get by staying invested against the benefit of selling them to reduce your EMI. If the EMI is becoming difficult to tackle, increase the loan tenure. However, making lifestyle changes till your debt is cleared is the best solution to sail out of debt. 

Borrowing for children's education or taking a home loan may be unavoidable. But refrain from borrowing for unnecessary reasons. Borrow only as much as you need. Prioritise your home loan debt as you may not want to lose it. 

A joint home loan allows you to share your debt burden and also entitles you to a higher loan as the income of the co-borrower is considered for eligibility. A married person can apply jointly with his spouse, parents or siblings. All co-borrowers can claim tax deductions under Section 24 of the Income Tax Act against interest paid and under Section 80C against principal repaid. The tax benefits that can be claimed would be in proportion of the share that the individuals have in the loan. 

If the interest rates take a nosedive in the coming weeks, people who want to buy their own house must borrow smartly and handle repayments meticulously. 

Home loan
Source : ET

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