Authored by Atul Monga
For the Indian consumer, owning a home has always been regarded as one of the biggest life goals of their career. While this is an exciting experience, it might be the biggest financial commitment that you, as an individual or family, will ever make.
Signing up for a home loan might be the way of converting your dream of owning a home into a reality. But, the reality of being bound to mortgage payments for as long as 20 years can hit hard, especially when downturns come to like the one we are experiencing right now because of the ongoing pandemic, and the financial pressure it brings, stays till the loan is paid off.
But what if you could speed up the process and pay off your mortgage early, you would save a small fortune on interest and free yourself from financial stress.
If you are looking for ways to pay off your home loan faster, here is what you need to do:
Reduce Your Loan Tenure and Negotiate with Bank for Lower Interest
To ensure faster repayment of home loans, you can opt for a shorter loan tenure. That means depositing additional money into your home loan account along with the EMI; resulting in lower interest costs. It’s always better to make a prepayment of the loan whenever possible. So, a quick repayment of the principal amount leads to saving on interest pay-out.
Secondly, many times, refinancing the tenure to a shorter-term might looks attractive but it’s always tricky when the commitment is for a higher monthly payment. If you are already ongoing with a home loan, it would be idyllic to negotiate with the bank to refinance the loan at a lower interest. However, not every bank is ready to lower your interest rate.
In this case, the other method is to keep comparing and monitoring the interest rates of different banks. This will help you transfer your balance to the other bank at a cheaper rate of interest. While this might be an ideal choice you will still have to pay a requisite fee to both the current and the new lender; like a penalty to the old lender and a processing fee to the new lender. Do a proper detailed analysis of the payment that you will make to both the lenders so that where you are trying to save on money but end up paying more.
Your bank will probably agree to give you a low-interest rate, whereas, if possible, go for a shorter tenure. It will help you close a home loan quickly and save considerably higher than paying a low-interest EMI.
Let us understand with an example, suppose you take a home loan of Rs 70 lacs at an interest rate of 8.5 percent for 20 years. In this case, your monthly EMI will be Rs 60,748. Total payment including principal amount will be Rs 14,579,520.
Now, suppose after 4 years, your bank lowers your interest to 7.5 percent, your EMI gets reduced to Rs 56,392. You will be saving around Rs 4,356 per month, which is a saving of around Rs 10 lakh. But if you can afford to pay a monthly EMI of Rs 68,932 you can reduce your home loan tenure to 12 years. This means in the short run you probably won’t be saving much but in the long run, you will be saving around Rs 22 lakh.
Increase EMIs with the Rise in Income
Of all the loans available in the market, a home loan has the longest repayment tenure. During such a period, your income is expected to increase with possible salary hikes/income additions. If you are a salaried employee or in any profession where you can expect your salary to increase over time and if it’s within your budget, pay more than the minimum amount due.
It might be one of the smartest ways as it will start getting your principal paid off when it's at its highest. Even a small increase in EMIs, depending on your loan and tenure can make a big difference and can bring down the remaining loan tenure.
Build a SIP and do Higher Payment
The cost of a home loan is massive and can cost your fortune. In many cases, the amount paid on the interest of a home loan is even higher than the loan amount. As per the above example, you end up paying Rs 14,579,520. These Rs 76 lakh extra is the interest you pay.
However, there is a way out to this loan interest as this is how a loan works. But did you know that systematic investment plans can you prepay your housing loan? If you start a SIP of 0.10 percent of Rs 70 lakh you will invest Rs 7,000 monthly. The total amount invested in 20 years is Rs 16.80 lakh and the total corpus accumulated is Rs 1.04 crore. Even if we deduct the invested amount it comes out to be Rs 88 lakh which is more than enough to cover the interest amount you will pay. This amount will help you in making the higher down payment and covering the principal amount.
Atul Monga is Co-founder & CEO at BASIC Home Loan