5 golden rules to follow when borrowing a home loan

We list the 5 best ways to ensure that your home loan does not get the better of you.

In an ideal world, one would live comfortably in one’s income and never want for anything. But real life often paints a stark picture. Sometimes, you need to borrow money to fulfil urgent needs. Investing in a house, sending a child abroad for studies, paying for a medical procedure…you need to borrow money for many needs in life.

But the borrowing must be governed by certain rules, so that you do not run into bad loans. Consider the following rules governing home loans:

1 Don’t borrow what you don’t need. It might be tempting to take a big loan to avail of the tax benefits on the interest you pay. In some cases, you can also get tax rebates on the principal amount. However, the tax benefit is nullified when you calculate the monthly outgo. Assess how much money you need, put your own funds on the line, and borrow only as much as you need.

2 Leverage technology.The Internet changed the way lending institutions communicate and transact with customers. You can just log on to a loan aggregator site to find out the latest home loan interest rates and highly rated loan products. Based on this information, you can select a good lending institution and apply for an online home loan. The online home loan request is processed within minutes, and you get an e-sanction to take the process forward.

3 Pre-pay as often as you can. It is all very well to repay the loan diligently for a period of 20 years or more through monthly EMIs. However, you pay a lot of money to the lending institution over the entire period of the loan. The EMIs comprise a mixture of interest and principal amount, so it is better to repay it sooner rather than later. You will need to save money regularly so as to make periodic pre-payments, apart from the EMIs. Doing this brings down the amount you owe to the housing finance company, and saves money for you.

4 Increase the EMI to reduce repayment amount.Another way to reduce the overall repayment money is to increase the EMI amount. This is best done if you have a higher income than before, or are confident of managing the monthly expenses despite an increased EMI. You can have the lender increase your EMI every year as your annual income rises. This has a dramatic impact on your loan tenure, as the total number of EMIs comes down and the loan is paid off quicker than expected.

5 Take a shorter tenure. Simple mathematical logic dictates that the EMI spread should be more, i.e. the tenure should be longer, if you want a smaller EMI. However, the longer the loan tenure, the more money you end up repaying the lending institution. So it is always better to take a shorter tenure so that the loan is repaid quicker and you save money over the long run.

Before you proceed with the loan application, make sure to research the latest home loan interest rates in India. Picking the lowest rate will help you get lower EMI.