Interest rates play havoc with the mind of potential home loan customers. It is often this cost that drives a customer away from a home loan. But, if you play smartly, you can reduce this cost and even use it to play to your advantage. Wondering how?
Let’s explain with the example of one smart individual name Manish.
Manish is self-made man. Hailing from West Bengal, he studied hard and landed a job at a respectable company in Mumbai. He rented out a house for the first few months. But he found many problems, firstly it was too small and he couldn’t get his parents over from West Bengal.
Moreover, he realized that the money he was paying as rent got him nothing in the long run. Being street smart, he decided that he would go in for a home loan and buy his own place.
But Manish didn’t dive straight into the debt. Instead, he looked for ways to reduce the strain of repayments. He read multiple articles online and spoke with many financial experts. Finally he devised a plan for his home loan.
He decided to go at it step by step, let’s see how he did it.
First Manish Decided To Work On His Credit Score.
He knew that if he worked on his credit score, which was already over 700, he would be able to negotiate on the housing loan interest rates offered. So for a year, he did not exceed his credit card limit, further he made sure that the bill for the same was always made before the due date.
He knew that a larger down payment would help, so next he started saving for it.
He moved out of the rented apartment and moved in with some relatives. He saved half of his rent more for then a year, the other half he paid to his relatives as a token of appreciation.
Over that one year he also got an increment & bonus. He decided to put the increment amount each month & the bonus into his down payment. Along with this, he broke a couple of his fixed deposits and accumulated quite a substantial down payment.
Since the interest rate is calculated on the principal amount, the lower the principal amount, the less interest rate he would have to pay.
The Third Step Manish Took Was To Use An EMI Calculator:
After working on his credit score & saving for the down payment, he started planning his repayment. He used an EMI Calculator to arrive at a near-accurate EMI amount. He was now armed with knowledge and budgeted his upcoming income accordingly, so as to comfortably adjust the EMI payment.
The Last Step; He Used His Housing Loan Interest To Claim Income Tax Deductions.
After applying for the loan buying a beautiful home in the suburbs of Mumbai, Manish used the home loan interest rates to his advantage by using it to claim income tax deductions every year. He knew that under section 24 of the Indian Income Tax Act, he could claim as much as Rs. 2, 00,000 annually.
This is how Manish play smart his housing loan interest and used it to his advantage. Manish is now contemplating prepaying his loan and becoming totally debt free in a few years.
Post which he will have a place to call home!