Among life’s important milestones, owning a new home and enjoying retirement are two significant occasions. Purchasing a new house is an important financial decision, as it can offer the individual a sense of security and pride. However, owning a new house comes with numerous responsibilities, and one of the most important is repaying the home loan. Home loans come with long repayment periods, and these can range from 10 to 30 years.
While the idea of taking a home loan to purchase a new house seems appealing, the thought of having a long-term mortgage payment can be daunting for some. Hence, it is important that you repay your home loan in full before reaching your retirement age. Furthermore, you must use a home loan eligibility calculator, so that you can plan properly.
Depending on your monthly income, interest rate, tenure, and other monthly obligations, you will know the loan amount you can avail of and how much you need to pay every month. That said, we take a look at the importance of repaying your housing loan in full before retirement, and how that can be achieved.
Importance of Repaying Your Housing Loan in Full Before Retirement
As long as you remain employed, you have an active income source, which can help you pay for your expenses and meet financial obligations. One of the main benefits of repaying your housing loan before you retire is the financial freedom you get to enjoy. You won’t have mortgage payments to worry about, and you can use your retirement savings to go on vacations or purchase expensive items. You can also rely on your pension plan to meet household expenses. Thus, your retirement funds can be used to meet important needs, such as healthcare expenses, travel, and hobbies.
Furthermore, knowing you don’t have to make fixed monthly payments and own your house gives you peace of mind. You can also leave your house as an inheritance to your children without burdening them with mortgage payments.
Another benefit of repaying your housing loan in full is having equity in your home. Your house can serve as a collateral to avail of a loan when required. If you decide to sell your house or put it up for rent, it can act as a source of income.
Recent RBI Guidelines and Hike in Repo Rate
Over the last 12 months, the Reserve Bank of India (RBI) has hiked the repo rate by 250 basis points. This change affected those who opted for a floating interest rate (EBLR), as the interest rates increased from 6.5% to 9%, raising the interest component. There are two options to handle the extra amount: You can talk to the lender to raise the EMI, or extend the repayment period to keep the EMI amount low.
However, in theory, this additional period can be as long as 5-10 years! This can make it incredibly difficult for those in their 40s or 50s to repay their housing loans before retirement.
How to Repay Your Housing Loan Before You Retire
Whether you are in your 30s, 40s, or 50s, it is crucial that you plan ahead. If you are in your 40s or 50s, here is how you can make a few adjustments and repay your housing loan before retirement.
Increase Your Monthly Payments
One of the most common and effective ways to repay your housing loan faster is by increasing your EMI payments. You can adjust your monthly budget to ensure you can pay your EMIs comfortably. If you currently allocate only 20%-30 % of your monthly income towards EMIs, consider using 35%-40% of your income for EMIs after making changes to your budget. Typically, you are not allowed to use more than 50% of your monthly income to pay home loan EMIs. You can stretch it to 50% if required, and repay the loan faster.
Refinance Your Mortgage
Another effective method is to refinance your mortgage. You will find lenders who provide housing loans against lower interest rates. You can use a home loan eligibility calculator, and see if you are eligible to pay less by replacing your existing mortgage. Ensure that you get better terms, and pay higher EMIs if possible. This will shorten the loan term, and you can repay the loan before you retire.
Prepay Your Housing Loan
If you receive a lump-sum payment, such as a bonus, inheritance, or money from your FD upon maturity, you can use it to pay a part of your housing loan. This can significantly reduce the interest amount you pay over the loan tenure.
Get a Co-applicant
In the event that you cannot pay a higher EMI amount and are nearing retirement, you should consider adding a co-applicant or guarantor. This is particularly beneficial if the co-applicant is comparatively younger, and you can request the lender to increase the loan tenure.
Rent Out a Room
If you have rooms to spare, you can rent them out to generate extra income. You can utilise this additional income to make higher EMI payments. This allows you to pay off your loan faster.
Consider Downsizing Your Home
If you believe that you have more space than you need, you can consider downsizing your home. If you sell your house and purchase a smaller home with a lower EMI payment, you can repay the housing loan faster, and free up more funds for life after retirement.
Final Thoughts
It is crucial that you repay your housing loan in its entirety before you retire, as it offers financial freedom and peace of mind. While the recent hike in interest rates can pose a problem, there are several steps you can take to repay your home loan. You can increase your monthly payments, refinance your mortgage, make a lump-sum payment, rent a room in your house, or downsize your home to repay your housing loan faster.
You can use a home loan eligibility calculator to accurately calculate the ideal repayment period to ensure you repay your housing loan in full before retiring. You can also consult a financial advisor to determine the best approach.