Buying a home is a dream that we’ve nurtured since childhood. And you now can make this dream a reality by availing of a home loan. But this sort of financial commitment comes with it’s own set of responsibilities and challenges.
Having a large portion of your salary dedicated to a monthly loan repayment never feels great and having to do that for 15-25 years can be quite infuriating. But remember, the longer you take to pay off a loan, the more you end up paying as interest. This is primarily why it’s a good idea to pay off your home loan as early as possible.
The tenure of your loan repayment depends on the loan amount and on the home loan rate of interest. But no matter what your interest rate is, making partial prepayments time and again is always helpful. In fact, according to media reports, most Indians strive to pay off their home loan in the initial 5-7 years of the loan tenure.
Here are some useful tips to help you do away with your loan faster:
By increasing the repayment amount at any time during your loan tenure, you can bring down the your loan amount. So if you come into an unexpected windfall or get a bonus at work, you could use the extra funds to make higher payments. Most lenders will allow you to schedule higher repayments without any sort of penalty or excessive paperwork.
It is best to create a plan about how to make the prepayments and start saving from today. If you start saving Rs 4000-5000 every month, you will be able to make a prepayment of Rs 50,000 in 10 – 12 months and that can go a long way toward minimizing your total liability. When you make a partial prepayment, make sure not to reduce your existing EMI amount. In fact, you should probably try and increase your prepayment amount, as well as your EMI, every year.
If you are unable to raise the capital to make partial prepayments you could also…
Change your EMI Structure
Have you ever thought of increasing your EMI amount even slightly? Increasing the EMI, even by Rs. 1,000-2,000, can go a long way toward bringing down the total loan amount.
For example, suppose you have taken a loan of Rs. 40 lakh at 10% per annum for a tenure of 20 years. An EMI of Rs, 38,601 will require you to repay an amount of Rs. 92.6 lakhs at the end of 20 years with an interest of Rs. 52.6 lakhs. On the other hand, by paying Rs. 42,984 each month, the tenure will come down to 15 years and the total amount you will have to repay will be Rs. 77.37 lakhs with the interest being Rs. 37.37 lakhs.
Invest in Mutual Funds
Mutual funds offer as much as 12%-15% annual returns on your investment and are one of the best tools for paying off hefty loans. To get started, consider investing in an SIP every month for a term of 5-8 years. You can also choose to put your money in a set of balanced mutual funds which is a mix of fixed income instruments and equities—this approach is especially useful if you are planning to pay off your loan within 5 years. If you’re planning to pay off a home loan by investing in a mutual fund, it is best to go with long term investment options as the returns are higher, and the risks, lower.
Choose a Lower Interest Home Loan
When looking for banks and financial institutions for home loans, look for providers which offer the lowest interest rate. Many times, a shift in RBI policy will force banks to lower their lending rates. If such a shift occurs during your loan tenure, it’s a good idea to look into a home loan transfer.
If you have a fixed rate of interest on your loan, you will not be able to take advantage of shift in the RBI monetary policy. A home loan transfer is an option that will give you an opportunity to avail of a lower interest rate that is prevalent in the market. Essentially, this scheme allows you to shift your loan from your lender to an institution that offers you a lower interest rate. At first, you should always have a word with your bank or NBFC regarding a reduction of your interest rate based on a good repayment track record. But if they disagree, you can shift to another bank or NBFC offering you a lower interest rate.
Remember to check for any additional fees and processing charges involved when doing such a switch.
Cut Costs Wherever Possible
Having a home loan to repay is a huge financial burden but it’s worth it since you have a house that you can call your own, a roof over your head that will help you and your family get through even the toughest times. This should (hopefully) motivate you to cut costs and sacrifice your luxuries for a faster loan settlement. You might have to set aside your plans to visit Europe for the initial few years of your loan tenure, but in exchange you will have the peace of mind that comes with owning a home.
A few other tips
As per RBI’s 2012 Monetary Policy, all prepayment penalties have been mandatorily waived. This gives you another reason to aggressively try and clear your debt as fast as possible.
- Proper financial planning is essential. Create an emergency fund of 4 – 6 months, to take care of any unforeseen expenditure. This would also prevent you from taking money out of funds that you have saved for making prepayments.
- Look at your home loan financial statement on a regular basis. This would give you an idea of how much of your EMI is going towards repayment of the principal amount vs. repayment of interest. Most borrowers don’t do this and end up sinking their EMIs into incessant interest payments.
While there are many things that you can do to pay off your debt early, it is really important that you put in as much effort as you can. Stay committed and you will become debt-free within a short period and live life without the burden of a loan on your shoulders.