In this post about home loan in Delhi we shall discuss the pros and cons of repaying home loans.
- Reduction of Interest Payouts– The obvious benefit of loan prepayment is that your interest payout gets reduced. Prepayment results in an abrupt decline of the due principal on the home loan which leads to less accrued interest on the loan account.
- Prepay without reducing the term– Normally when you prepare to prepay, you have two choices. Either you can lessen the number of instalments or keep the number of instalments unchanged but lessen the EMIs. For instance, if you prepay the home loan by Rs. 100,000, you may be have two choices-
- a) Instead of paying your EMI (e.g. Rs. 10000 per month ) for original term of 120 months, decrease the tenure of the same monthly instalment of Rs. 10000 to 110 months (descriptive) OR
- b) Keep the number of EMIs unchanged, e.g. 120 months, but lessens the monthly instalments per month from Rs. 10000 to Rs. 9500, i.e. a lessening of Rs. 500 per month in monthly cash outflow.
I prefer the second option, because it brings improvement in the monthly cash flows by a lower per month cash outflow and reducing the family budgets. Any extra cash savings can be put to use for further prepayments.
- Create Investment Vehicle – If you still want to go ahead with prepayments, instead of settling your loan off, put the prepayment money in an investment vehicle like a Mutual Fund SIP.
- Debt Equity Ratio– It is one of the basic financial ratios and possibly one of the first ratios examined by analysts to recognize how perilous a financial decision really is and thus forming the relevant financing cost. Whilst leveraging states that the bigger your loan is, the better will be your net returns. Though, the opposing feature linked with it is – the bigger loan you have, the lenders find your investment more risky.
- Utilizing mortgage as overdraft account- This is a rarely used option. Outside India, the product is usually known as an Offset mortgage. In India, the product is sold by SBI under the name Max Gain. In this kind of mortgage account, if you have excess funds, you can deposit that in your mortgage account or bank and interest shall be calculated on the balance mortgage loan. You are at liberty to withdraw the deposit and the interest shall impose on the residual balance. Hence, when you have extra funds, you diminish your interest payouts. If you come across an investment prospect, you can pull out the funds from your mortgage and fund it. By doing so, you are likely to get a fine blend of putting extra funds into work and at the same time having the elasticity to get the funds back when required. It is imperative to note that any deposits in such an account don’t end up diminishing your mortgage balance lastingly. The surplus funds provisionally defer interest accruals on the deposited amount till that time when these funds are not withdrawn by the account holder.