New Delhi: The most important benefit of closing your home loan early is obvious - you become free of EMIs, which are probably the biggest recurring debt currently straining your monthly income. This is definitely a desirable scenario under the right circumstances. In previous years, the penalty involved in prepaying or closing a home loan was a major deterrent, but banks can no longer levy such a penalty.
Assuming that getting rid of this monthly burden is more important to you than the tax benefits of servicing a home loan, you need to start planning your finances and get ready for the big push. This is not an overly complicated process, but it does require you to keep your ultimate goal - closing your home loan - firmly in mind at all times. The ideal time to start acting on this goal is while you are in your late 30s or early 40s.
This is usually the period when most professional people are done with job hopping and are earning a steady salary with reasonable growth prospects. Most will also have been servicing a home loan for at least 4-5 years. It bear to remember that banks structure home loans in such manner that they obtain the largest part of the chargeable interest in the first few years of the loan tenure. Also, this is the period in which one should already be planning financially towards one's retirement.
Regardless of how financially secure you currently are, the first step towards eventually closing your home loan early is always the creation of a safety net. Paying off a home loan invariably requires a considerable corpus of accounted-for cash. If you use all your available finances to close your loan, you are left with nothing to handle unexpected contingencies. These contingencies could be anything from losing your job to medical emergencies.
To keep you and your family solvent in case you need to find a new job, you should have at least 6-8 months' worth of salary saved up. These savings should not be tapped for any but the intended purpose. To safeguard against the often crippling expenses of medical emergencies, avail of medical insurance with a cover of at least 10-15 lakh for your whole family. Additionally, you must ensure that your children's education is taken care of, and that you have invested in a solid retirement plan.
With the financial safety net in place, it is time to build the corpus that you will need to close your home loan early. You should begin by taking a close look at all the ways in which you lose money each month. For instance, you may own one of more credit cards with unusually high interest rates. You may have availed of these cards because of the glitzy benefits you were promised by a sales executive - benefits which you probably never use.
If you are not a heavy shopper of luxury items, a frequent international flyer or someone who is excited about access to the premium airport lounges, you don't need these cards. Get a simple, no-frills credit card with a reasonable credit limit and cancel all others. The savings on interest rates will make a significant difference.
Likewise, pay off all personal loans and sell off or discontinue money-draining time-share vacation memberships if you do not use them regularly. Today, most of these memberships extract highly inflated annual charges which increase every year - you can actually holiday more cost-effectively without them, with a better spread of vacation locations.
Most people assume that the best way to save up for paying off their home loans is to accumulate money in savings accounts or fixed deposits. The fact is that the meagre interest you earn on money in a savings account does not even beat inflation, so you actually lose money by keeping it there. Fixed deposits are also not what most people assume them to be. Investing in fixed maturity plans or mutual funds with consistently good performance records is a much better option.
The interest earned on fixed deposits is fully taxable. On the other hand, the returns earned on mutual funds attract dividend distribution tax or capital gains tax, depending on whether one has opted for the dividend or growth option. In either case, the taxation on such funds is lower than the income tax paid on fixed deposits. The lower tax and higher returns of mutual funds translate into better earnings.
Even after making these investments, do not park all your liquid funds in a savings account. Instead, move as much of your disposable income as possible to a liquid fund, which earns you higher interest. Liquid funds get you better interest than savings accounts, and you still retain ready access to your money if you need it.
If you follow these guidelines, you will find that you can reach the point at which you can pay off your home loan whenever you wish much faster. It requires discipline and planning, but it brings you much closer to the proud day on which your bank hands you the ownership papers of your fully paid-up house.
Arvind Jain, Managing Director - Pride Group