Three things to discuss with your financial advisor about your home loan
Your financial advisor can help you with all financial products, not just investments.
This includes your home loan.
Here are three pointers for discussion:
1. Tenure vs EMI
Interest rates are going up.
Your lender will — where possible — extend the tenure of your loan and keep the EMI constant.
This works for the lender: they get more interest from you.
You should — where possible — try and keep the loan tenure the same. Or at least try to minimise the increase.
This works for you: you pay less interest.
Even when rates go down, a similar discussion can save you a lot of money.
2. Invest or prepay
How should you use your savings — invest them or pre-pay the loan?
This need not be an either-or choice. You could use some of your savings to prepay the loan and invest the rest.
We often suggest investing 2/3rd to 3/4th of savings. And using the rest to pre-pay.
But there is nuance to this rule. It is influenced by the relative size of your liquid assets. And by point #3 below.
3. Prepayment — aggressive or laid-back?
Should you prepay aggressively or let the EMIs take their own course.
In the first few years of your home loan, your EMI is largely interest payment. It is good to push hard at this stage to reduce interest cost.
Towards the end of the loan, it is largely principal repayment. So don’t be in a rush now.
Lots of people just want to be rid of the loan. And are quick to pre-pay towards the end of the loan. It is an emotionally satisfying decision. But it may not be a financially sound one.
For example, in a 20year loan at 7%:
Three reasons why you should speak to an advisor about your home loan?
1. The math of home loans is not always intuitively obvious.
It helps to run through the number.
We have created the Save Money And Reduce Tenure (SMART) app. You can use this to have a discussion with your advisor on your home loan.
2. Your financial situation is specific to you.
While rules-of-thumb are helpful, your situation is unique to your circumstances. An advisor can fine-tune these rules-of-thumb and help you reach a better decision based on your requirements
3. Make room for your emotional make-up
We all have emotional biases and fears.
While we can sometimes intellectually recognise that we have a bias, it is often not easy to adjust our behaviour to account for them.
While we may strive for rationality, we should be willing to settle for reasonableness.
An advisor can help you recognise your fears and biases. And help you get a better financial outcome.
If you would like to speak to us, send us a message on social media or use the form on our website.
We are happy to have a chat.
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