How to Plan Repayment of Home Loan before Retirement?

If you are a salaried individual, then your Home Loan EMIs are calculated based on your present monthly income. Lenders use Debt-to-Income Ratio to calculate how much of your monthly income can go towards EMI payments. This calculation is made after appropriating a certain percentage of the salary for fixed monthly expenses. But it does not factor in the reduction in your income post-retirement. You would not want to be paying your Home Loan EMIs from your pension or your retirement corpus.

So, you should repay your Home Loan before you retire to lead a debt-free retired life. Here are some useful tips to help plan Repayment of Home Loan before you retire:

Strike a balance between EMI and repayment tenor:

At the time you Apply for a Home Loan, you need to strike a proper balance between three factors, i.e., your income, EMI you can afford, and the repayment tenor you should choose. The maximum repayment tenor available for Home Loans can extend up to 30 years based on your eligibility. But you should not opt for the maximum repayment tenor just because you are eligible for it. You need to understand that not only will your interest liability increase with a longer repayment period, but you will be under the burden of debt for the whole time.

Hence, opt for a repayment period that gives you an EMI amount that you can easily afford from your present monthly income. Though, you must make a provision for your fixed monthly expenses before committing a percentage of your income to the Home Loan EMIs. In essence, select the shortest repayment period possible according to your EMI affordability because you want to repay your Home Loan before you retire.

Make part pre-payments:

One useful feature of Home Loans against floating interest rates is that there are no pre-payment and foreclosure charges. So, you can repay your Home Loan before your retirement without incurring any additional costs and save a substantial amount on your interest liability. You can use your bonuses, incentives, or other windfall payments to make regular pre-payment towards your Home Loan. You need not wait for any windfall payments to make a part-payment. Smaller and regular payments can help in ensuring quicker repayment of your Home Loan by reducing the EMI as well as the repayment period. For instance, suppose you have a Bajaj Finserv Home Loan of Rs 1 crore with an interest rate of 9% per annum and have opted for the maximum repayment tenor available of 20 years. If you pay Rs. 6 lakhs after every 12 EMIs as part-prepayment, you can actually repay your Home Loan in approximately 9.3 years, without increasing the EMI.

Avoid discretionary expenses:

Though you must undertake the necessary expenses to maintain your lifestyle, avoiding unnecessary discretionary expenses is also important. For instance, instead of going on two overseas holidays a year consider going on one overseas holiday and one local holiday. Avoid splurging your savings and income on expenses that are not adding any value to your finances. Instead, use the money to make pre-payments towards your Home Loan. You can also prepare a monthly budget for all your expenses under different heads. Each month use surplus funds to save for pre-payment of your home loan. This way, you will be able to repay your Home Loan much before you retire and lead a financially independent life thereon.

Pool family funds:

If like most millennial homes, your family also has multiple working individuals, then you can efficiently pay-off your Home Loan without compromising on your lifestyle. All members must pool in their income into one account and then manage the different requirements from it after proper discussions. This includes monthly expenses, EMI payments, investment contributions, savings, and every other financial requirement of the family. Thereafter, you will be left with a substantial sum, which can be used to pay off your Home Loan.

Make wise investment decisions:

You need to plan your investments according to various landmarks in your life, such as a wedding, higher education, or overseas vacation. Create an investment portfolio that comprises of different investment schemes with low, moderate, and high-risk potential. Plan investments according to the time when you will need the money for various life goals. This will help you avoid arranging a substantial sum of money from your retirement corpus or regular finances when the need arises. Thus, you can use your spare funds for Home Loan pre-payment without worrying about the impending future requirements.

Review your investments:

Do not hesitate to take tough investment decisions. Many times individuals end up with an endowment plan or fixed monthly income plan that is not generating returns as expected. In such a situation, you need to identify such investments and dispose of them as soon as possible. The amount being paid as a premium for such policies could instead be better utilised towards quicker repayment of your home loan.

Tax-benefit analysis:

 Do not opt for a longer repayment tenor to maximise the tax savings. Many individuals make this mistake without realising that they are paying much more amount in interest than what they are saving as tax. Paying interest to save tax is not advisable. For instance, the maximum deduction on home loan repayment available to you is Rs. 3.50 Lakhs (Rs 2 Lakhs under Sec 24(B) and Rs. 1.5 Lakhs under Sec 80C). If you fall in the 20% tax bracket, the maximum income tax savings you can get is Rs. 70,000. Moreover, the tax benefit under Sec 80C can be availed through other investments also. Now, if you end up paying more interest than this amount, it will not be a wise decision. You must, therefore, undertake a tax-benefit analysis and instead divert your money to investments that offer better returns.

So, by following these simple yet efficient tips, you can easily repay your home loan before you retire and lead a worry-free life during your golden years.

Also Read: Top 5 Home Loan Repayment Options Revealed Just For You

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