How can I keep up with my mortgage payments?
There is no greater joy than having a roof overhead that you can call your own home. You have worked hard to save for your down payment and putting your papers in order to get your home loan sanctioned. But the fact is that your test has only begun, for you will be servicing your mortgage for a good number of years now and that is indeed a huge responsibility. In order to service your home loan, along with your other loans well, you must indeed think and act like a fund manager. Here are some tips that will help you in prudent money management:
Find ways to maximize your benefits
When you have a home loan to service, the first thing to do is to list out all your savings and investments. Scrutinize all your investments carefully to find out investment instruments giving lesser returns than the interest rate on your home loan. Endowment insurance plans, ULIPs and postal deposits may be examples of such investments. It will be wise to close most of such investments and divert the funds towards servicing your home loan. You should ensure that your long term savings are undisturbed.
Ways in which you can repay your debt quickly
A home loan is a debt like any other and the sooner it is closed the better it will be for you. Here are three ways to reduce your debt burden:
Partial pre-payment of loans :-
This is one of the easiest ways to reduce your debt burden. Every time you get a bonus, a cash gift from family or friends or any other gains as a result of investments made in the past, direct them towards making pre-payments on your home loan. All banks allow a certain number of prepayments in a year without any extra cost. If you receive windfall gains, you can even consider pre-closing your loan. There is no charge on the foreclosure of your loan either.
Switching to a bank offering better interest rates :-
If you find that you are stuck in a higher band of interest for a long period of time compared to the current market rates, you can consider switching your loan to a bank which offers you a loan at a better rate of interest. This may shave off the number of years of the tenure of your loan, thus resulting in considerable savings on your interest component. However, do ensure that the interest rate differential is at least 0.75-1%, which makes it worth going through the whole credit appraisal hassle again with the new bank.
Increase your EMI outflow :-
You will end up paying off your debt faster if you can consider the option of increasing your EMI outflow. For instance, if you are paying approximately Rs. 38,950 as an EMI for a loan of Rs. 40 lakhs for a loan tenure of 20 years, you can reduce your loan tenure by roughly 5 years if you can increase your EMI by merely Rs. 2,300. You can consider this option if you get a pay hike or redirect funds from an endowment plan towards this end.
How can you better plan the payment of your EMIs?
Pritwish and Leena Bose had only one wish at the time they got married about five years back. They wanted to have a home of their own and ever since they have planned this, they put money aside for their dream home. Both being software engineers in one of the leading software firms in the nation, getting a loan was fairly easy and they did indeed buy a two bedroom apartment in Hyderabad in January 2013.
But barely a year has gone by since they had a grand celebration of their home, that the young couple seems far from happy, because their EMI is putting strain on their finances. When they felt their marriage was hanging by a thread, a trusted friend suggested that they go to a financial advisor instead of a marriage counselor and that advice has worked like magic in their life! If you are feeling the strain, because you think you have overleveraged on a home loan, you can follow the path of the couple and will find that managing your EMIs is not that unbearable.
Changing your perspective about your loan :-
The first thing that the financial advisor told the Bose couple that they should be thankful that they have jobs that are good enough to service their loan. He also said that they should be acclaiming themselves about the fact that they have invested in an asset and have not squandered their money away. That was half the battle won!
Shouldering responsibilities in a better way :-
Following the advice of their financial planner, Leena and Pritwish have separated their loan and savings accounts. Now the home loan EMI is deducted from Pritwish’s salary account, while all the household expenses are taken care of by Leena’s salary. The couple has also opened a joint account where they are building a contingency fund bit by bit, so that they do no miss even a single EMI. They are aware that a single missed payment may impact their CIBIL score negatively.
Considering pre-payment option :-
This seemed like a far- fetched suggestion to the couple when their advisor suggested it (since they were barely being able to manage their EMIs), but on careful thought the couple found that it could be a great thing to do. On their recently concluded fifth anniversary, both their families gave them some cash gifts which they have put away. They are both due for a bonus payment in June 2014. Instead of spending this chunk of money on a fancy curved LED TV, the Bose’s have decided to make a partial pre-payment on their loan.
Redoing the math :-
The advisor sat with the couple and found out what their savings and investments were on the one hand and what were their expenses. It was found that Leena had a recurring deposit of Rs. 3000 and Pritwish had a ULIP that were not giving them very good returns. The advisor asked Leena to direct the recurring deposit towards the EMI and advised Pritwish to go with a term policy with a larger cover to secure their future. It was also discovered that the couple spent at least Rs 5000 each month partying with friends in fancy places. To cut down on these expenses, Leena has started potluck parties each weekend and her friends have followed suit. Not only do they save big bucks, but it is great fun too!
By rejigging some finances and organizing their lives, the Bose couple seems to have sorted out their troubles over EMI. With the blaming and bickering reduced to a minimum, both are finally feeling better about their having their own roof over their heads. The curved LED TV can wait, they say!
What to do if you can't afford to pay your EMI?
Suresh Nair is a diligent employee of a well-known construction company headquartered in Mumbai. He has been servicing a home loan for the last couple of years now, but suddenly finds himself in a dilemma, because he has had to fork out Rs 1 lakh as the admission fee of his child and settle the medical bills of his father who has recently undergone a cataract operation. His EMI is due on the 1st of every month and he knows that he will not have enough money to pay it off for the month of June. The likes of Suresh, are not habitual defaulters and his case is a genuine one. Instead of panicking Nair went to his friend Nitin, who is a financial advisor by profession. Here are the things he asked Suresh to do.
Get in touch with your bank :-
The first thing Suresh was asked to do was to get in touch with his bank. Suresh does not think that his situation will improve drastically in the next six months, so he can consider rescheduling his loan term, by increasing the tenure of his loan. Of course, this means a higher interest outgo, but at least it reduces his EMI burden. Nitin assured Suresh that the EMI can be re-negotiated when his financial position improves.
If you think that you will be able to pay up in a month because you are expecting a salary hike or a deposit to mature, you can ask the bank to defer the payment until such time. The bank will allow you to do so, but will charge you a penalty on the amount overdue.
Prioritize your payments :-
Before you reach out to your bank, it makes sense to look at your portfolio and see if you can juggle your sources of funds to make payments on the home loan account. In fact, you should have a contingency fund to take care of your home loan, car loan and credit card payments in case there is an unforeseen expense as has been on Suresh’s case.
Look for some additional income :-
Nitin who knows Suresh from school, knows that he is a great writer. With several content writing opportunities in the city now, Nitin has advised Suresh to take up some content writing assignments that will provide him with some extra income that he is desperately in need of at the moment.
Reducing monthly expenses :-
This is a no-brainer, but Nitin sat down with Suresh and worked out the places where he can save money. It turned out that the Nair family eats out every second week and plans a weekend trip at every given opportunity and a big family vacation once a year. Their entertainment expenses work out to be close to Rs 8000 to Rs 10,000 each month. Suresh and family have decided to take fewer trips and eat out once every month in order to save money.
Check your CIBIL report :-
Nitin has advised Suresh to purchase his CIBIL credit report and score, once he has cleared all his overdue payments and he is back on his feet financially. If you are in a similar situation, make sure you check your CIBIL report and see that your bank has updated the information on your loan account. If it has not been done, make sure to raise a dispute immediately to get it rectified.