13 Ways To Manage Your Housing Finances Better

The relationship between income and affordability for various income groups follows a nonlinear trend. Owning a house means investing a substantial amount of money – probably the single largest investment made by any person aspiring to purchase a house. It is obvious that many people may not have the means to buy a house and may have to look out for possible funding resources. Availing loans from banks or other financial institutions in the form of home loans or mortgages is one of the ways to fullfil your dream if you have a regular source of income.

Earlier the gap between middle-class income and cost of houses was huge, which made buying a house near to impossible. But during the last decade, the gap between the income level and the housing cost has come down significantly and more people are now interested in acquiring properties. That’s why there is increasing demand for middle-income housing. Moreover, interest rates have also come down significantly, compared to what they were a few years ago.

1) Avoid incurring more debts that you can handle. Since a mortgage loan involves a huge sum and a longer repayment period, it is crucial to take your repayment obligation seriously. Always remember that your home – your most important property – is at stake. Avoid applying for other loans that can be an additional burden. Keep your credit card spending in check. Whenever possible, try to pay more for your mortgage. The sooner you can complete your payments, the better.

2) Arrange a fixed interest rate on your home loan. It is recommended to choose a home loan with a fixed interest rate. Although a fixed-rate loan may start out with a higher rate, compared to a variable-rate loan, you can be assured that your monthly payment won’t change, regardless of the increased prime rate in the market.

3) Consider getting a debt consolidation loan. If you are managing two or more types of loans, consider consolidating your debts for easier repayment. Consolidating or ‘merging’ your debts into a single loan can significantly lower the interest rate you are paying.

4) Consider refinancing your loan. If you are in the middle of repayment, consider refinancing your current mortgage to lower your rate. Refinancing a loan is recommended, especially if you notice a considerable improvement in your credit score.

5) Make a lump sum payment. If your finances allow you to pay your mortgage completely, do so. This way, you can be secure about your investment.

6) Put in a large payment on your loan whenever possible. Instead of paying just the minimum due, try to pay more of your mortgage to cut down your balance more quickly.

7) Don’t go for a loan just because it offers a very low rate. Do not sign up for a home loan just because it is offering a low interest rate. Keep in mind that a variable-rate loan is bound to change at any time during your repayment term. Half-way through your loan term, you may find that you are stuck with balloon payments, which can make repayment very difficult.

8) Obtain a loan that gives you more options and flexibility. Look for a mortgage lender that offers flexible repayment options. Make sure that modification of your loan’s term is possible just in case anything unexpected takes place (for example, unemployment or sickness).

9) Go for a long-term mortgage. A home loan with a fixed interest rate and a reasonable repayment period will be less of a burden than a short-term loan with variable interest.

10) Save for down payment. Submitting a higher down payment can reduce your loan interest rate by 20-25%. Therefore, prepare your down payment prior to acquiring a mortgage loan.

11) List of savings/investments. Make a list of all the loans and savings/investments that you have made. Do you find instances where the savings/investments are giving lesser returns than the loan rates? This can typically be seen in endowment insurance plan, EPF and PPF, postal deposit and even ULIP. Why should you invest in something when you are paying higher interest to somebody else? It is better to close all or most of these lesser returns savings/investments and divert the funds to close the home loan.

12) There are ways to come out of the EMIs and make your loan tenure shorter. These include:
1. Partial pre-payment
2. Switching to a lower rate
3. Increasing the EMI

Now let us look at these options in more detail. The best part is – these options do not, in any way, add to your existing budget.

13) Partial pre-payment. This is the easiest way to close a housing loan faster. The method is to make use of any one-time income such as bonus, salary arrears, gifts from friends/relatives, any windfall from the share market, money from a property sold, deposits closed, tax-saving investments maturing, closure of savings that are giving you lesser returns than the housing loan, etc., to partially close the housing loan.

These one-time payments help reduce the principal balance in the loan. And when the EMIs continue, they have to cover less principal.

So the same EMIs require less time to close the loan. The earlier and more frequently these partial pre-payments happen, the faster you can close the loans.

The author Brijesh Parnami is the CEO, Distribution at Destimoney.