How can I keep up with my mortgage payments?
There is no greater joy than having a roof overhead that you can call your own home. You have worked hard to save for your down payment and putting your papers in order to get your home loan sanctioned. But the fact is that your test has only begun, for you will be servicing your mortgage for a good number of years now and that is indeed a huge responsibility. In order to service your home loan, along with your other loans well, you must indeed think and act like a fund manager. Here are some tips that will help you in prudent money management:
Find ways to maximize your benefits
When you have a home loan to service, the first thing to do is to list out all your savings and investments. Scrutinize all your investments carefully to find out investment instruments giving lesser returns than the interest rate on your home loan. Endowment insurance plans, ULIPs and postal deposits may be examples of such investments. It will be wise to close most of such investments and divert the funds towards servicing your home loan. You should ensure that your long term savings are undisturbed.
Ways in which you can repay your debt quickly
A home loan is a debt like any other and the sooner it is closed the better it will be for you. Here are three ways to reduce your debt burden:
- Partial pre-payment of loans- This is one of the easiest ways to reduce your debt burden. Every time you get a bonus, a cash gift from family or friends or any other gains as a result of investments made in the past, direct them towards making pre-payments on your home loan. All banks allow a certain number of prepayments in a year without any extra cost. If you receive windfall gains, you can even consider pre-closing your loan. There is no charge on the foreclosure of your loan either.
- Switching to a bank offering better interest rates- If you find that you are stuck in a higher band of interest for a long period of time compared to the current market rates, you can consider switching your loan to a bank which offers you a loan at a better rate of interest. This may shave off the number of years of the tenure of your loan, thus resulting in considerable savings on your interest component. However, do ensure that the interest rate differential is at least 0.75-1%, which makes it worth going through the whole credit appraisal hassle again with the new bank.
- Increase your EMI outflow-You will end up paying off your debt faster if you can consider the option of increasing your EMI outflow. For instance, if you are paying approximately Rs. 38,950 as an EMI for a loan of Rs. 40 lakhs for a loan tenure of 20 years, you can reduce your loan tenure by roughly 5 years if you can increase your EMI by merely Rs. 2,300. You can consider this option if you get a pay hike or redirect funds from an endowment plan towards this end.