Where to Find Money for Home Loan Prepayment?

A few weeks back, I wrote about the impact of RBI repo rate hikes on your home loans EMIs. RBI Repo rate hikes will quickly translate to longer loan tenures or higher EMIs for the borrowers, especially if your loan is linked to an external benchmark.

If there is scope to increase the loan tenure and not change the EMI, your monthly budget will remain untouched and you may still be fine, cashflow wise. However, if the EMI goes up, your monthly expenses may go up and you can face a cashflow crunch. Not good.

My limited experience is that the cashflow struggle keeps you under constant pressure and that’s not good for your health. There may also be an adverse impact on your personal and professional lives too. Hence, avoid cashflow crunch.

And how do you do that? A way out is to make a partial loan prepayment. A prepayment would reduce loan outstanding and thus bring the EMI (or loan tenure) back to the levels before the rate hike. Another is to shift to a lender that offers a lower rate but let’s assume this is not a possibility. You are already with a cheap lender.

Back to prepayment option. However, there is a problem. It is easy for me to ask you to prepay your loan by a few lacs but where will you find money for such prepayment. A few lac rupees is no small change. In this post, let’s look at some of the avenues that you can use to generate the much-needed cash for home loan prepayment.

#1 Use Your Annual Bonus

Not everybody has this luxury but if you do, this is the lowest hanging fruit. There is no impact on your monthly cashflows either. I am sure many of you already use annual bonus to prepay home loan regularly. The bonus is usually sizeable, compared to monthly salaries. Hence, you would see a very swift impact. If you had planned an expense from those annual bonuses, you might want to reconsider the priority.

#2 Use a Bit from the Emergency Fund

This is a risky suggestion. If the emergency corpus is robust, then you can withdraw a bit from the emergency fund and use the amounts for prepayment. Don’t overdo it. Can easily backfire. If you dip too much into your contingency fund, you may have not much left when a real emergency arrives.

#3 Hand Loan from Family/Friends

A short-term loan from family or a friend can also come in handy. You can think of such a loan as a bridge loan. You expect cashflow from any source (FD or life insurance maturity etc.) in a few months. You take a short-term loan from a person close to you, prepay the home loan and return the money to your family/friends when you get the redemption/maturity proceeds. However, before requesting a loan from a close friend or family, figure out the repayment plan for that loan. You don’t want money matters to affect your relationships.

#4 Sell/Break an Existing Investment

If you have a bank fixed deposit that yields 5% and a home loan where you pay 7%, there is case for breaking the bank fixed deposit and using the proceeds to reduce your home loan liability. I assume such a fixed deposit is not part of your contingency fund. And you don’t have to stop at just bank fixed deposits. You may have other assets too. Stocks, bonds, gold, mutual funds.

This should be the last resort. If the push comes to shove, consider selling a portion of such assets too. I know, “what about my long-term goals” and all that? I get that but what other option do you have? Everyone is wired differently but nothing bothers me more financially than the prospect of a cash crunch.

There will be “what ifs”. What if my mutual fund scheme or the stock runs up right after I sell? Yes, anything can happen but sometimes it helps to be rational. Some decisions go right. Some go wrong. You should be fine if your decision-making process is fine (you made the decision after thinking through all the angles). Never judge the quality of decision based on the outcome.

Besides, there are times when you just feel wedded to an investment. Even though the investment has not given good returns (and does not have good prospects either), you just can’t exit for various reasons (emotional attachment, can’t book a loss). Plus, no matter how bad the stock/investment is, it can always rise. All of us have seen such things happen enough times. If nothing else, you have hope. As they say, never let a good crisis go to waste. When under the pump due to EMI increase, use this opportunity to suppress your emotions and get rid of such toxic investments.

#5 Take a Loan with an Easier Repayment Schedule

Not all loans work on EMIs. There are loans such as loan against PPF or against insurance policies where the repayment period is bullet, or you just have to pay interest until you decide to close the loan.

I understand (and urge caution when) taking a loan at 10% to prepay a loan at 7% is not a smart decision, but you might consider this option if this reduces pressure on your cashflows. It is possible, by opting for such an arrangement, your cashflow needs for the short term may go down.

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