Why a Home Purchase Plan is Important – A Home Loan Checklist

Buying your dream house is not just an emotional milestone; it is also a significant financial milestone. Therefore, having a structured and thoughtful Home Purchase Plan is crucial. A carefully designed plan ensures financial stability, creates peace of mind and helps you efficiently manage your resources, bringing you closer to your goal of owning your dream home.

Financial Stages of Your Home Purchase 

Home Purchase is a commitment towards betterment and security for your loved ones. However, It is also important to understand the various stages of buying a house and what are the financial implications for each. Proper planning at each stage ensures smooth transitions and avoids unnecessary financial burdens.

Down payment

One critical element of your Home Purchase Plan should focus on maximizing your down payment through a dedicated investment goal. A substantial down payment reduces your loan amount significantly and consequently, the less you repay over the years. Creating a dedicated investment plan early on helps you systematically accumulate funds needed for your down payment, ensuring that your owning a home is less stress-free and household liquidity is under greater control.

Home Loan

The balance amount of your home purchase, beyond your down payment, usually comes from a home loan. Currently, home loans come at relatively lower interest rates. Moreover, these loans offer considerable flexibility. For instance, if you wish to keep your monthly outflow manageable, you can opt for a longer home loan tenure, thereby reducing your monthly EMI burden. This can provide financial comfort by lowering the monthly repayment amounts, making it easier to balance other expenses and financial goals.

Prepayment of Home Loan

Your financial planning does not end with purchasing your home. The first few years of your home loan carries the highest interest component and hence it is important to have a repayment plan for the home loan. A well thought out repayment plan helps you reduce your loan tenure significantly, saves on future interest payments and provides immense peace of mind. Long tenures expose households to prolonged leverage and the uncertainties that come with it. By planning to repay your home loan, you can reduce these risks and feel financially secure sooner.

Benefits of Prepaying Your Home Loan

•Reduction in Financial Leverage: Home loans often extend for decades, leaving your household finances leveraged for an extended period. Prepaying your home loan reduces this leverage, thereby decreasing financial vulnerability.

•Peace of Mind: Being debt-free provides unmatched emotional and psychological comfort. Clearing your home loan ahead of schedule offers a sense of security, knowing that you fully own your home without ongoing financial obligations.

•Enhanced Cash Flow: Once your home loan is paid off, the monthly EMI you were previously committed to becomes available for other important life goals, such as your child's education, retirement planning or a family vacation fund. 

There are primarily two ways you can approach home loan prepayment:

•Regular Bullet Re-payments: Making lump-sum payments at regular intervals directly reduces your principal outstanding. This approach immediately decreases your interest burden and shortens your loan tenure. It is especially beneficial if you expect consistent inflows, such as bonuses, increments, or financial windfalls.

•Investment Linked Re-payment: Alternatively, you could use Systematic Investment Plans or SIPs in Mutual Funds aligned with your goal of home loan repayment and then use the accumulated corpus to make substantial prepayments at specific intervals. This method allows your investments to grow through compounding, potentially enabling you to pay off your loan even faster or more efficiently.

Each approach has its merits, and selecting one will depend on your financial situation, risk appetite, and financial goals. For instance, bullet payments are ideal for those who have predictable and stable additional income. On the other hand, the investment-based approach might suit individuals who prefer growing their funds through market-linked investments for potentially higher returns over time.

Why Are SIPs in Mutual Funds Best Suited for Repayment of Home Loan Goal?

A home loan is a long-term obligation, and many borrowers aim to prepay their loan to reduce interest costs and achieve freedom from debt. Systematic Investment Plan or SIP in Mutual Funds can be a very efficient way to achieve this goal. 

Let's discuss in detail on why SIP in Mutual Funds is a preferred investment mechanism to fulfill this goal.

Higher Returns Compared to Savings or Fixed Deposits: Traditional savings like Fixed Deposits (FDs) or Recurring Deposits (RDs) don’t even beat inflation. Equity Mutual Funds have historically delivered inflation beating over the longer term. Of course, one cannot overlook the risk of investing in an equity mutual fund. And one of the ways to mitigate the risk of investing in an equity mutual fund is by staggering your investment through an SIP.

Systematic and Disciplined Investment: SIPs ensure a consistent and automated investment and are popularly termed as ‘the Good EMI.’ Instead of accumulating money in low-yield investments, SIP  in Equity Mutual Funds can be very effective to create a corpus towards your home loan prepayment goal.

Power of Compounding: SIPs enable long-term and goal based investing. This makes way for the ‘8th Wonder of the World’ which is Compounding. Often unseen or invisible in the early period of investing, compounding can really make the difference in your wealth creation journey. SIPs are ideal tools to harness the power of compounding as these make long-term investing risk mitigated and affordable. Small investments made through SIPs accumulate into a significant corpus over the years, enabling the repayment of your Home loan.

Conclusion

Given the complexities and significant financial implications involved, it is prudent to consult a financial planner or an advisor who can illustrate various scenarios based on your specific goals and personalized financial situation. Experts can model multiple outcomes, helping you understand the implications of different repayment plans clearly and allowing you to make informed decisions.

At FinEdge, we emphasize goal-based investment planning, empowering you to make informed decisions that are aligned with your goals and aspirations. Our experienced portfolio investment managers can help you create a personalized home purchase and prepayment strategy, post considering your unique financial situation like household cash flows, risk tolerance and personal financial ratios. By collaborating with FinEdge, you can navigate your home purchase journey confidently and efficiently, ultimately turning your dream of homeownership into a fulfilling reality.

In summary, the importance of creating a structured Home Purchase Plan covering your down payment, leveraging suitable home loans and proactively planning your home loan prepayment cannot be overstated. It is the roadmap that ensures your journey towards your dream home is smooth, secure, and financially rewarding.

FAQs

What are the benefits of making a higher down payment on my home purchase?

A higher down payment reduces your loan amount, reducing your debt burden. Since your loan amount is lesser, the chances of repaying the loan faster is much higher. The key is to create a corpus for your down payment by investing for your Home Purchase goal at the earliest stage of your investing journey.

Should I choose a shorter or longer home loan tenure?

Longer tenures reduce monthly EMIs but increase total interest payments. Longer tenures of your Home Loan would also keep your household financially leveraged for a longer period. It is advisable to choose the ideal tenure based on your monthly affordability and the future outlook of your income.

How does prepaying my home loan impact my financial planning?

Prepaying your home loan frees up your cash flow earlier, enabling you to invest more towards retirement, children's education or other financial goals, thus significantly enhancing your long-term financial stability. Prepaying your home loan also unburdens the household of debt which is essential for financial freedom.

Can FinEdge help create a personalized home loan prepayment plan?

Yes, FinEdge specializes in goal-based investing, creating customized investing roadmaps for clients. Home loan prepayment is an essential goal to plan for and we at FinEdge, can significantly accelerate your journey towards financial freedom, enabling you to confidently redirect resources towards fulfilling other life goals like Retirement, your Child’s Education, etc.