Your home is your most cherished possession and perhaps the most important asset you have created in your lifetime. But the home loan you have taken is, after all, a debt burden you want to be free of as soon as possible. While it may not be possible to foreclose the loan in a few years, it is wise to consider pre-payments that reduce your debt burden progressively and also helps you save.
The advantages of pre-payment
Here is how. Say you have a home loan of ₹ two crores. At the interest rate of 7.5%, your EMI translates to approximately ₹1,61,000. If you have savings of ₹50 lakhs in bank fixed deposits or any other investment vehicle and make a pre-payment with the same, your debt burden comes down from ₹2 crores earlier to ₹ 1.5 crores—the part pre-payment of your home loan results in savings of ₹ 40,000. As a result, your EMI to approximately ₹1,20,000.
This amount may not seem large upfront, but if it is seen in a larger context of the EMI tenure of 20 years, it translates into savings of approximately ₹96 lakhs that you would have paid over 20 years. No matter what investment route you choose today, it is nearly impossible to garner similar savings just by choosing to make a home loan pre-payment.
This simple math is finding many takers among many new-age home loan borrowers today, who wish to make timely pre-payments in bulk and foreclose their loan accounts in less than ten years rather than be under a debt burden of 20 years or more.
Other foreclosure options
To help them achieve these ambitions, reputed builders and developers partner with their customers to come up with the best options to make the pre-payments as planned. For instance, not everybody may have savings of a hefty amount of ₹ 50 lakhs, as stated in the example above. Further, there are other crucial financial goals that you cannot ignore.
In such a case, instead of bulk payment or waiting for years to accumulate a large amount, starting pre-paying as small as 5% of the outstanding principal amount each year is sensible. A back-of-the-envelope calculation shows that by pre-paying 5% of your loan every year at the same interest rate of 7.5%, about 32% of your loan will be paid through par-payments, thus reducing the debt obligation.
You can consider a “home saver” option in case of restricted liquidity. This is a facility provided by banks and other financial institutions wherein you can opt for an overdraft facility when you take a home loan. You can choose to park your surpluses here and make withdrawals as per your requirements.
Choose your developer wisely
When choosing a property, it also helps to opt for reputed builders with an existing track record in the market. Instead of discussing foreclosure options with bankers, it is wise to opt for a developer who provides value-added services.
The right developer-partner will help you determine your eligibility, structure a customised home loan option, and work out the right pre-payment plan. This partnership approach by the developer enables you to make an informed decision about your debt obligations while ensuring your financial health is intact.
Therefore, choosing the correct developer is half the job done.