After you take a home loan

Caution: Do this if and only if your investments are yielding less than the EMI's you are paying out towards your home loan.

In my previous post, I discussed what you should do before you take a home loan.

Now that you have taken that home loan and you are now the proud owner of your grand new home, start thinking of reducing debt. This is by far the biggest debt you are likely to have.

But first, take an account of the money you will be spending on your house from now on:

a) Maintenance - from now on you will be constantly engaged in some enhancement / repair or the other
b) Fresh coat of paint every 4-5 years - you cannot be seen dead in a shabby looking house, now, will you?
c) Yearly Property tax

What you save immediately are:

i) That rent that you were paying to someone else
ii) Income tax
Therefore, the actual EMI you are paying out is only the money you are paying on top of (i) and (ii).

If you are alright with the outflow, do not bother to reduce the debt. You may feel the pinch for the next few years but soon your income will increase (you are due for a promotion, aren't you?) and then the EMI will seem lot smaller (as a % of you total income, I mean).

But if your EMI is HUGE, then try reducing the debt as soon as possible.

Here are three methods that I know of:

a) Some banks offer an account along with the loan (often called a Home Saver Account or something similar). You could park your excess money in that account. The account will earn the same amount of interest as your home loan. You don't get the interest earned in your hand. It goes to the home loan interest. So, it is like paying off a part of the interest but having liquidity at the same time. The best way is to direct your office to pay your salary to this account. Here's an example.

b) Look out from banks that offer a much less interest if you are willing to move your home loan from other banks to this bank. Read the offer carefully though. There may be certain conditions in those fine prints that may not be to your liking. Also switching costs may be high. In any case, what you could do is go to your existing bank and tell them that the other bank is enticing me with a lower EMI, and whether they could do something about it. You have a great chance to reduce your existing EMI.

c) I have done this and works like magic - suppose, you get some extra money from somewhere (could be a bonus from your company). Pay off a part of your home loan. The trick is that you need to do this early on. You see, the initial EMI's have larger component of your principal and lesser component of your interest. Your EMI's that you pay later have substantial interest component. So, paying off even a small amount early on in the tenure goes a longer way in chopping off months from your tenure.

There is one last note I wish to add: If you are on floating interest and the interest drops, the bank will offer you a choice between reduced tenure or reduced EMI. I always chose the reduced tenure. By combining this and paying off parts of the principal early on, I reduced my home loan tenure from 15 years to 6.5 years, at which point I borrowed some money from my parents and paid off the entire home loan. Yes. Today I have a home that is debt free. That leaves me with an asset that can be mortgaged, should I need to.