Saturday, 21 February 2015

PROS and CONS - Foreclosing A Home Loan

Foreclosing the loan at the earliest will help us save the amount that is paid as interest to the bank, but-

Buying a house is no longer a dream too big for the com mon man today, as there are many feasible options available in the market.

One can easily buy a house by taking a home loan. But paying EMIs for a long time can be a big burden on the borrower.

In fact, a major part of one's earnings go towards EMI payments for the entire home loan tenure or till one forecloses the loan.

“Ideally your EMI shouldn't exceed 40% of your monthly earnings. If it exceeds 40%, it is better to foreclose the loan either in tranches or completely, depending upon your payment capacity. However, foreclosing the loan is suggested only if it doesn't disrupt your financial cycle,“ Nitin Vyakaranam, founder and CEO of an online financial planning firm, says.

Keep 5 points in mind before foreclosing a home loan:

1. Don't foreclose the loan within first six months of the loan tenure:
The RBI had some time back waived off the penalty charges on foreclosing the loan, which is hugely beneficial to the borrowers. Even if there are banks that offer this option-many dis many dis courage this they would actually charge you a high processing fee. It does not make sense to take a loan if we are capable of closing it in a very short span of time.

Therefore, if we have a lump sum amount, then we should meticulously analyse where to park it before we foreclose our home loan.

2. Check Tax Benefits:
There are certain tax benefits available on a home loan. For instance, under Section 80C of the I-T Act, tax deduction up to Rs 1.5 lakh can be availed for repayment of the principal amount, while under Section 24B, tax deduction of up to Rs 2 lakh can be availed on the interest paid for home loan for a self-occupied home.

But if we are foreclosing a loan, then we wouldn't be able to avail these tax benefits. Here we need to make a firm decision whether we should really wait to avail these tax benefits or clear the liability if we have enough surplus amount with us. In case we want to avail the tax benefit, then we should wait for some years, so that the maximum benefit can be availed and then we can foreclose the loan.

3. Calculate the impact on other financial goals:
Foreclosing the home loan could have an impact on other financial goals; also, it is not advisable to divert funds from other goals just to foreclose a home loan.

For example, to close the loan we might divert our retirement savings into foreclosing the home loan, which is not at all advisable.It is important to demarcate our financial goals and save or invest accordingly.

“Buying a home should be one of the goals, but not at the cost of other mandatory goals. The amount that you spend on foreclosing the loan shouldn't disturb your financial health. If we have less time to meet goals like children's education, retirement, etc, then it is advisable to postpone the idea of foreclosing the home loan for some time,“ Vyakaranam says.

4. Foreclose loan in the initial years of loan tenure:
If we have enough liquidity flow in hand even after saving for other financial goals, then it is ideal to foreclose the loan in the initial years of the loan tenure.

5. Measure Rate of Return Vs Rate of Interest:
If we have enough liquidity with us, then instead of foreclosing the loan, it is advisable to invest in a diversified portfolio consisting of various asset classes which would yield higher returns.

However, it is ideal to clear the liability if we are nearing our retirement or have sought an early retirement. We should foreclose the loan only if the Rate of Return on investments is lower than the Rate of Interest being paid for the home loan.

No comments:

Post a Comment