Smarter Home Loan Management

By Sridhar Reddy

It is not the end of financial crisis management with just the banks lowering their interest rates for home loans. HNN explains how one can go about ironing out the wrinkles in the home finance kitty.

It is high time that you get over the doom and gloom set in by recent happenings in the financial world, and do some serious thinking towards putting your personal finance status in order.

Make a beginning by comprehensively reviewing your financial status. You must spell out your financial goals, obligations, holdings, assets, risks and insurance. Ideally, you should consult a personal finance consultant.|

If you are the ‘Do-It-Yourself’ types, the basic principles listed below should hold you in good stead.

nPay immediate attention to your insurance/ risk coverage. Stressful times like these, endanger your family’s and your health. Make sure your family and you are adequately covered by medical expense reimbursement policy (popularly known as mediclaim policy). All wage earners in your family should also have adequate critical illness and life insurance. It may sound a little contradictory to spend money on insurance premiums at a time like this, but be sure that every penny is well spent here. You cannot afford any financial distractions during these tough times, arising from illness/accident. Illness may be inevitable but if you are adequately insured, the financial burden will not worry you.

*Attend to your loans, particularly high cost ones like unsecured personal loans and credit card debts, on priority.

These loans tend to have low tenure, coupled with high rates, thus higher EMIs’. If you have relatively low yielding investments like fixed deposits, then you should consider breaking those deposits for clearing these debts. While on fixed deposits you may be earning only 10 -11%, on credit card debts you are paying somewhere in the range of 40 - 45% and 16 - 25% for unsecured personal loans. No amount of prepayment charge can justify continuing such loans. Just keep enough in your savings account or bank fixed deposits to meet your contingency needs. Use the balance to pay off these high cost debts.

*If you do not have fixed deposits, you can try moving to lower interest loan by taking loan on security of your existing house. You can take a loan/additional loan on your existing house property and pay up your personal loan/ credit card debts. This way you can use lower cost money to retire your high cost debt. In case additional loan on your existing house property is not available, then look for other cheap loans against surrender value of your insurance policy and/or loan against financial securities (mutual fund units, units in ULIP plans of insurance companies, equity shares, etc.)

*Shop for a deal on existing home loan for better rates or else, consider switching to lenders who offer best rate.

Approach various lenders with the intent of transferring the loan. The success of the deal or the lack of it will be dependant on your income and the repayment track record on your existing home loan. If you are getting at least half a percent lower interest rate then your existing loan, you should consider switching your loan.

*Do not discontinue your Systematic Investment Plan (SIP) as in the current market scenario, it will fetch you higher number of units and this brings into play the rupee cost averaging, that is so crucial for the success of SIP plan. If you have a lump sum which you need to invest, you can park your money in the debt plan which you can transfer into equity in a phased manner through a systematic investment plan. A lay consumer should ideally not make a lump sum equity investment but do so gradually.

*If bank deposits are something you like, you can take advantage of current high bank deposit rates by starting a recurring deposit. In recurring deposits you are locking in your money at the rate today but money will only be invested later. It is a good idea to consult a financial planner to get that peace of mind which you have been seeking to achieve.