Thursday, January 10, 2008

How to manage your home loan ?

Having control of the interest portion of the home loan is the most important part of managing a home loan. The reason is because the interest portion of the home loan is an expense. And controlling this expense is very important in order to save money. After having a 20 year home loan for sometime there are a few things that I have learnt in the course of it which I would like to share.
  • Even if you get a tax break for 30% of the EMI (Equated Monthly Installment) on a home loan remember that the remaining 70% is an expense so unless you are making up that 70% either by renting out the home that you have or are saving it in rentals (if self occupied) it is not worth having the loan.

  • Always keep track of your home loan by using an amortization sheet. You can use a sheet that I prepared by reading this post. This sheet calculates the principal and interest payments that are going out based on the interest rate and principal outstanding at that point of time. The issue with this sheet is that you will have to maintain the changes in interest rate and the principal repayments made by you. The advantage of this sheet is that you can play around with it by doing a prepayment or by changing the interest rate and see how it will effect your loan.
    If you have taken a loan from ICICI bank then link up the home loan to your ICICI infinity login and you will be able to see the amortization sheet online. The disadvantage with the sheet they have is you cannot download it and you cannot play around with the numbers but it will give you the numbers that you need to fill up the excel sheet above. I think it is absolutely key that you have this sheet to keep track of your loan.

  • Making prepayments in the beginning of the loan tenure where the interest payments are high and the principal payments are low has a great effect on reducing the tenure of the loan. So try and make as many prepayments as possible right in the beginning - try and channel as much money as you can in prepaying the home loan.

  • If your disposable income goes up (in the case when salary goes up) then try and change the tenure of the home loan - this will increase the EMI but what it will do is that each month it will increase the principal portion of the loan and reduce the interest portion of the loan. There is a cost associated with this so ensure that the savings incurred are a lot more than the costs involved. You can calculate the savings by using the amortization sheet.

  • If you are on a variable rate home loan then interest rates are always calculated as PLR (Prime Lending Rate) - spread. Home loan companies in India rarely change the PLRs but if you visit property exhibitions you will realise that they are offering new home loan customers a cheaper interest rate and they do this by changing the spread. So you can look into changing from one scheme where the spread is more to a scheme where the spread is less. Doing this can cost as you have to close the first home loan and take another one with the new spread so the savings have to be worked out before you decide to do this. You can calculate the savings by using the amortization sheet.

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