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Sunday, October 19, 2008

Tips For People Availing Home Loans

EMI flexibility option

This is how it works: You pay a lower EMI (equated monthly instalment) in the initial years and subsequently, you increase the repayment in congruence with the growth in your income. Another option is to accelerate the EMI as and when your disposable income goes up.

In certain cases, when you avail of loan to buy a property under construction, some banks/HFCs permit you to pay just the interest component till it is ready for occupation. Subsequently, you can start paying higher EMIs tracking your income growth. The upside is that you can finish the repayment within stipulated time. But again, your income growth should be capable of accommodating the rising EMIs over a period of time.

However, experts caution against opting for such schemes. This is a typical problem. The housing finance companies (HFCs) try to sell step-up loans or accelerate EMIs in a bid to sell a higher loan amount. But that’s not a wise idea as it would eat into your future income even before wealth creation. Unless the year-on-year income growth is more than 30%, it would be very difficult to cope with increasing EMIs. Firstly, you have an increasing headline inflation, which has upped the prices of basic necessities. Over and above that, you would also have to deal with the mounting lifestyle inflation.

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I would never recommend anyone to go for the accelerating EMIs option, as there is no point prolonging the repayment. It is better to get out of debt as soon as possible. Neither you should take bridge loan to repay part of home loan.

YOUR ACTION PLAN

1) Extend the tenure

You can extend the tenure of loan in such a way that the EMI outgo remains at a manageable level. For example, you may have opted for a 20-year loan. If the increment doesn’t meet your repayment plan, you can extend it up to 28 years. That would keep your EMI constant. The flip side is that you will have to shell out a higher interest amount with the tenure extension. In such a case, you could consider part pre-payment of the loan whenever you have surplus funds.

2) Make use of surplus funds, investments
If you have windfall gains like bonus, you can use the funds to prepay your loan. Also, you can consider liquidating the debt instruments that are not yielding good returns.

3) Cut your expenses
The best recourse to such problems is making changes in your lifestyle. You should cut corners and lower your consumption needs to meet the EMIs. You have two options. Either you make self changes or loan-related changes such as tweaking payment schedules and looking at different repayment plans. However, making lifestyle changes is always advisable!

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