Sunday, March 18, 2012

how to manage your home loan

how to manage your home loan : The RBI recently brought in a ruling effective February this year to curb property values from being inflated. According to the new rule, stamp duty, registration and other taxes such as VAT and service tax will be excluded when property value is considered for determining the loan amount.

Now, this means that borrowers need to pay it as part of their down payment. This news, however, should not be taken in the negative light by the borrower. It's actually a blessing in disguise.

Because, the more the down payment, the lower will be the loan amount and interest cost.

In fact, borrowers should strive to increase the down payment as much as they can. This will not only help save on interest cost but will also reduce the time to repay the loan.

Time the purchase
It is a good idea to choose a time when builders try and promote the sale of property with attractive discounts.

This typically happens during the period before interest rates begin the downward trend, when builders like to quickly sell out slow moving projects that had accumulated during a high interest regime. In fact, the time now is ideal as the exact scenario described above is unfolding now, with interest rates expected to decline anytime in the next few months.

You should take a home loan now to cash in on the falling rates, which will help you lower the interest cost of your loan.

Make partial prepayments
You can use part of your savings to prepay the loan, thus reducing the tenure.

If your loan amount is well within 40 per cent of your income, you could easily set aside money to prepay at regular intervals. From your savings try and set aside 10- 20 per cent of your income for home loan repayment. Accumulate this amount every three months and make a quarterly prepayment.

With most housing finance companies and some banks having done away with pre-payment charges, this is a good incentive to prepay. Even if there are pre-payment charges, please note most banks do not charge a penalty for partial prepayments up to a certain limit. Verify these details before you plan your loan prepayment and make the most of it.

Move to bigger home
Typically a home loan has a very long tenure and the cycle is filled with highs and lows in interest rates, which can easily stretch the loan to several years unless you actively follow some the steps detailed above to repay your debt quickly.

After the first 5 or 6 years of your home loan, you might want to shift to a bigger house or a better location as your needs dictate.

In such an instance, you can post a discussion with your bank, sell your existing home for a nice profit, and repay the remainder of your loan. You can then shift to a bigger home with a new home loan and a higher down payment. On an average it is best to restrict your loan tenure to 10 years if you opt for a 20-year loan. Factor in your career prospects, increase in passive income, spouse's income, accumulated savings etc. and optimise the benefits from these factors to close out your debt. Living debt free should be a personal goal that you should strive for especially when the years roll by!

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