Clearing all the debts and loans is the best feeling for anybody. However, it is not easy to attain this feeling. Having a housing loan may give birth to a dilemma for you: whether you should repay your loan or add on the extra money as your bonus.
Home loans are significant loans that every person can avail of once in their life. There is no penalty for repayment in a home loan. Hence one can set themselves free from all the debts in a decided tenure.
However, many factors are to be considered here, such as interest rate, repayment tenure, tax benefits, and so on!
The rate of return is lower
If you plan to repay your loan, you are first supposed to calculate the benefit you will get for not paying the amount asked. You can check the amount of interest by a loan against the property interest rate calculator. However, the amount is lower than the amount saved as interest; this would be a much better repayment option. For example, if the home loan is Rs.50 lakh with a repayment tenure of 20 years and a 7.5% interest rate. Now you pay Rs.5 lakh repayment at the end of 5 years; then, you can save the interest rate up to Rs.8.8 lakh from the tenure.
On the other hand, you can invest in Fixed Deposit with an interest rate of 5.4%. So this way you can earn up to Rs.6 lakhs in 15 years. Now the interest rates are lower for home loans.
The interest rate may rise when the Reserve Bank of India (RBI) increases their rates. If we talk about the floating rate of home loans, the lenders may increase it, which will cause an extra burden on your loan amount and other expenses.
Limit Credit Utilization
Many people make the mistake of taking Loans with higher EMI’s than they can currently afford. They do this expecting their income to increase over the years. But it would be difficult to pay their EMIs in case of a pay-cut or loss of job.
Opting for high EMIs leads to higher credit utilization. This in turn affects their credit score.
A lower EMI will help in clearing credit dues in full every month and keep help lower credit utilization.
The home loan EMI should lie between 30 to 40% of your monthly income because it may cause higher credit utilization. If the home loan EMIs reach up to 40%, then you should opt for renting rather than buying the property because high credit utilization may also affect the credit score and future borrowing capabilities. So it would be more convenient if you restrict your EMIs to up to 40% of hand-to-hand monthly salary. Restriction of their EMIs also allows the person to invest in savings and other expenses. But if we talk about the best amount of EMIs every month is 30%. One can find the eligibility criteria online by checking on the home loan eligibility calculator.
Finding a fine balance
To live a debt free life it is important to plan your loan repayment and your savings. Ensure a separate fund for Medical Emergencies so that in case of one, your EMI payment is not compromised.
If the beneficiary is the only earning member in the family, it is advisable to set aside an amount that is sufficient for one year of living expenses. This is to ensure that in case of loss of job or any other unexpected expenses, the EMI repayment will not be disturbed.
Summary
A housing loan is the best way to get their dream house. They need to take care of the repayment tenure, required documents, and eligibility criteria to avail the home loan. Build your dream house by extending your finances with the best offers of home loans and affordable EMIs from companies offering housing finance in India.
