Home Loan Repayment Hacks Every Homeowner Should Know
Most Indians dream of owning a home. One may not be able to purchase a home without a home loan - which is high in amount and has a longer home loan repayment period. What can you do to reduce your repayment time? How well can you manage your finances so that your family can enjoy a vacation? Low EMIs result in a longer tenure and heavy interest charges.
It is important to ask: How high can an EMI get? Does it affect your loan in any way? Here's an example. For example, if you take out a home loan for Rs 50 lakh for 20 years at an 8.5% interest rate, your EMI will be around Rs 43,237 per month, your interest will be around Rs 54.13 lakh and the total repayment will amount to Rs 1.04 crore.
Is it possible to pay off the loan in 15 years? Your EMI of Rs 49,237 would result in interest of Rs 38.62 lakh and repayment of Rs 88.62 lakh.
Simply put, Rs 5,846 a month can save you Rs 15.38 lakh in home loan repayment over five years! Adding a penny to your EMI reduces your interest payment to the lender. With your other monthly financial obligations, it may not be so easy. Even so, a few adjustments here and there during the first few years may prove beneficial in the long run.
The returns you earn from equities or a debt fund/fixed income scheme may easily provide you with the means to pay the extra mile on EMI payments.
The following hacks may prove helpful if you do not expect that to happen anytime soon.
Hack 1. Higher Down Payment
You could reduce your principal amount significantly by paying a higher down payment at the beginning of your home loan. Having a lower principal will result in lower interest payments and EMIs. Your EMI will remain unchanged after the down payment. The early repayment of your home loan will save you a lot of money.
Hack 2. Annual Increase In Your EMI
If you change jobs, you may see exponential growth in your income. You can reduce the amount and time of repayment by increasing your EMI by about 5%. The mortgage repayments are for Rs 57.62 lakh at an interest rate of 8.5 percent over 20 years. Your EMI is Rs 50,04 with a total repayment of Rs 1.20 crore. A salary jump of Rs 54,998 for 16 years could result in nearly Rs 14 lakh in savings for you (reduction in total repayment) if you can afford to pay Rs 54,998 as your EMI.
Hack 3. Home Loan Prepayment
Unlike increasing your EMI, you pay an extra installment at the end of every year. A loan for 50 lakh rupees taken for 20 years at 9% interest (EMI of Rs 44,986) can be repaid in just 12 years using this approach. You can pay Rs 5,84,818 (Rs 44,986 13 months) instead of an annual EMI of Rs 5,39,832.
Hack 4. Refinancing
Refinancing your outstanding home loan can also reduce your repayment amount. Your total repayment in the earlier example amounts to around Rs 1.08 crore. The EMI will be slightly less than Rs 1 crore even if you get the same loan at an 8 percent interest rate (instead of Rs 44,986). Around Rs 8 lakh can be saved by just a 1 percent difference in interest rates.
Hack 5. Use Windfall Gains
In addition to investment returns, salary bonuses, money from policy maturities, and so on, you may also use these funds to foreclose a mortgage. The decision to pre-close the loan depends on your financial situation. In any case, make sure you are familiar with the lender's prepayment policy.
Hack 6. Make Lifestyle Changes
You'll save substantial money by making this unconventional change. Reduce expenses such as expensive dining, extra purchases/subscriptions, and unnecessary gadgets.
Additionally, a tenure extension is an option. It may relieve you from the heavy EMI burden, but you will probably have to pay a hefty interest rate. Additionally, you may have to repay the loan until your retirement years, at which time it is best to save. It may seem advantageous to extend a loan if you have already repaid a significant portion of the principal.
You don't have to struggle to repay your home loan repayments. Use these simple yet effective hacks to reduce your loan burden, reduce interest payments, and achieve financial freedom sooner. Each extra payment or smart decision gets you closer to owning your home outright.