Five Smart Home Loan Tips

Buying a home is one of the biggest financial decisions most people make. A home loan can be one of the smartest ways to achieve that goal, but how you structure and manage the loan matters equally. Here are five points to keep in mind if you already have a home loan or plan to take one.

1. Keep the down payment minimal

Consider keeping the down payment to the minimum level required by the lender. Home loan interest rates are relatively low and currently generally range between 7% and 9%.

Over the long term, equity and gold investments have the potential to generate returns higher than the cost of a home loan. Therefore, instead of putting a very large amount into the property upfront merely to reduce your loan, the surplus money can remain invested for long-term wealth creation. This approach is particularly relevant for younger borrowers with stable incomes and a long investment horizon.

2. Opt for the maximum practical tenure

If the bank offers you a choice of 15, 20 or 25 years, consider choosing the longest practical tenure. A longer tenure keeps your compulsory EMI lower and gives you greater monthly cash-flow flexibility. Since a home loan is generally among the cheaper forms of borrowing, it makes sense to use it smartly while allowing your investments to benefit from long-term compounding.

Importantly, choosing a longer tenure does not mean you must actually take the entire period to repay the loan. You can gradually increase your EMI as your income grows.

3. Don’t make prepayment your only goal

Many borrowers make repaying their home loan their sole financial objective. Every bonus, increment or surplus gets directed towards prepayment. Avoid making that your only priority.

Instead, consider increasing your EMI gradually every year. If your current EMI is Rs 20,000 and your income rises by 10%, increase the EMI by a similar 10% to Rs 22,000. This can help you repay the loan faster while continuing to invest towards other important goals such as your child’s education and marriage, buying a car, vacations and, most importantly, your retirement.

4. Keep your EMI within 33% of income

As a broad rule, your home-loan EMI should ideally not exceed 30-33% of your monthly income. Think of your income in three broad buckets: living expenses, loan repayments, and savings and investments for future goals. Saving and investing should remain non-negotiable.

If your EMI consumes significantly more than one-third of your income, you may be over-leveraged or may be buying a home before your finances are ready for it.

5. Create a ‘home loan cashback’

Calculate the approximate total amount you will pay through EMIs over the entire loan tenure. Alongside your home loan, start a separate SIP in an equity mutual fund and continue it for the same period. With disciplined investing and long-term compounding, the objective is to build a corpus that can potentially equal, or even exceed, the total EMIs paid over the years. I call this your “home loan cashback”.

A home loan should help you own a house without stopping your journey towards wealth creation. Keep the EMI manageable, increase repayments as your income rises and, importantly, continue investing alongside it.

(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605.)