Is it a Good Idea to Use the Annual Bonus for Prepayment of a Home Loan?
Jun 26, 2019 Home Loan
Home buyers know how monthly EMIs strain the financial budget of the family. A large sum of money goes into paying the monthly EMI, and there’s not enough left to run the household and have considerable savings. If the loan borrower is the only earning member of the family, then the situation becomes even tighter. In such a scenario, the annual bonus comes as a relief to the home loan borrowers.
While some may use this bonus money to invest in the areas that they have meant to, some prefer to prepay their home loan. Prepayment of home loan can either reduce the burden of monthly EMI to bring down the tenure of the home loan. Either way, it is a win-win situation for the home loan borrower. Getting rid of the financial burden is something a home borrower wants.
We discuss if it is an excellent idea to prepay your home loan:
1. Do you have enough savings?
When you invest in a property, the right amount of your savings goes into buying the house. Paying the monthly EMI is also not easy. Even though banks and financial institutes insist that one should not use more than 40% of their monthly salary to pay the EMI, it does not always happen. Home buyers sometimes end up using 50 – 60% of their monthly salary to pay the EMI. This leaves them very little in hand to manage the monthly expenses and savings. It is a good idea to use the bonus money to build savings again.
2. Will prepayment help you in the long run?
It is an important question that you must think about before using your bonus money to prepay the home loan. The main goal behind prepayment is to reduce your monthly EMI, but a small amount of prepayment will not help. It is better to save for a few years and then pay the money altogether as prepayment. You will see how drastically it brings down your home loan burden. You can also use the bonus money to invest in other investment areas like mutual funds and use the maturity value to prepay the home loan.
3. Are you rushing it?
It is understandable why one would want to prepay their home loan. The sooner one gets rid of the financial burden, the better. But before you make the decision look around and make sure that there isn’t any immediate need that you are overlooking. Paying a home loan means spending money wisely. It is alright to let take a break from it and go a little easy on your expenditure.
While some may use this bonus money to invest in the areas that they have meant to, some prefer to prepay their home loan. Prepayment of home loan can either reduce the burden of monthly EMI to bring down the tenure of the home loan. Either way, it is a win-win situation for the home loan borrower. Getting rid of the financial burden is something a home borrower wants.
We discuss if it is an excellent idea to prepay your home loan:
1. Do you have enough savings?
When you invest in a property, the right amount of your savings goes into buying the house. Paying the monthly EMI is also not easy. Even though banks and financial institutes insist that one should not use more than 40% of their monthly salary to pay the EMI, it does not always happen. Home buyers sometimes end up using 50 – 60% of their monthly salary to pay the EMI. This leaves them very little in hand to manage the monthly expenses and savings. It is a good idea to use the bonus money to build savings again.
2. Will prepayment help you in the long run?
It is an important question that you must think about before using your bonus money to prepay the home loan. The main goal behind prepayment is to reduce your monthly EMI, but a small amount of prepayment will not help. It is better to save for a few years and then pay the money altogether as prepayment. You will see how drastically it brings down your home loan burden. You can also use the bonus money to invest in other investment areas like mutual funds and use the maturity value to prepay the home loan.
3. Are you rushing it?
It is understandable why one would want to prepay their home loan. The sooner one gets rid of the financial burden, the better. But before you make the decision look around and make sure that there isn’t any immediate need that you are overlooking. Paying a home loan means spending money wisely. It is alright to let take a break from it and go a little easy on your expenditure.
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