HOME LOAN REPAYMENT STRATEGY THAT CAN DO WONDERS

Owning a home is the biggest dream for the majority of Indians. As housing has become one of the most expensive investments in one’s lifetime, one may not be able to go about it without the help of a home loan — which in turn, is high in amount and has a longer repayment duration.

So, how can you cut down on your repayment time? How well can your finances be managed so that you can afford that vacation your family is looking forward to? If you keep your EMIs low, the tenure is longer and you end up paying heavy interest on the principal amount.

The question to ask is — how much higher can an EMI be? And what effect does it have on your loan? Let’s take an example. Supposing you have availed of a home loan for Rs 50 lakh at an 8.5 per cent interest rate for 20 years — your monthly EMI comes to around Rs 43,237, and the total interest you’d end up paying comes to around Rs 54.13 lakh and the total repayment cost in 20 years at Rs 1.04 crore.

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What if you want to finish off the loan in 15 years? A small calculation would bring your EMI to Rs 49,237, amounting to a total interest of Rs 38.62 lakh, and a total repayment of Rs 88.62 lakh.

In simple words, an extra Rs 5,846 a month can help you cut five years of loan repayment time and not burn a Rs 15.38-lakh hole in your pocket!

Every extra penny you pay on the EMI gets added to your principal amount, thereby reducing the total interest you are supposed to pay the lender. It all seems great on paper, but may not be that easy with your other monthly financial commitments. However, a few adjustments here and there for the first few years can benefit you in the long run.

Put your savings to good use, say in equities or a debt fund/fixed income scheme and the returns you get from that may just easily give you the fodder for the extra mile on EMIs. If that’s not something you see happening anytime soon, here are a few more tips that could help you save time and money.

1. Higher down payment

If you can pay a higher down payment at the beginning of your home loan, it could substantially reduce your principal amount. A lower principal will have lower interest and EMI payments.

But here, you can keep your EMI the same as before you made the down payment. It will help you repay your home loan early, and you will save hugely on repayment.

2. Annual increase in your EMI

There are chances that your salary will see hikes each year, or you jump jobs and see exponential income growth. Compliment your EMI with that salary jump, say even about a 5 per cent rise in EMI can help you reduce the repayment amount and time.

For instance, if you have a home loan running for Rs 57.62 lakh at an 8.5 per cent interest rate for 20 years, and your EMI stands at Rs 50,004; total repayment at Rs 1.20 crore. If you can manage to pay Rs 54,998 as your EMI with the salary jump, you may see the finish line in 16 years with nearly Rs 14 lakh savings in your pocket (reduction in total repayment).

3. Home Loan Prepayment

This is a similar route, except for increasing your EMI amount, you pay an extra instalment at the end of every year. For example, repayment of a Rs 50-lakh loan taken at a 9 per cent interest rate for 20 years (EMI at Rs 44,986) can be closed in just around 12 years if you implement this method.

In simple words, in place of paying an annual EMI of Rs 5,39,832 (Rs 44,986 * 12 months), you may pay Rs 5,84,818 (Rs 44,986 * 13 months).

4. Refinancing

Refinancing the outstanding home loan is also an effective strategy to reduce your overall repayment amount. In the earlier loan example, your total repayment stands at around Rs 1.08 crore. However, if you can get the same loan at an 8 percent interest rate, the EMI comes down to Rs 41,822 (instead of Rs 44,986) and the loan repayment will be slightly above Rs 1 crore.

In all, you will be saving around Rs 8 lakh with just 1 per cent difference in the interest rate.

5. Use windfall gains

You may also put to use the investment returns, salary bonuses, money received on policy maturity, etc. for the foreclosure of a home loan. You may opt for either a full pre-closure or a partial pre-closure of the loan, depending on your finances. But before choosing this option, ensure you are through with the lender’s policy on any prepayment charge that may be levied.

6. Make lifestyle changes

It’s unconventional, though an important change that helps you save substantial money. Cut down on expenses such as expensive dining, extra purchases/ subscriptions, and avoidable gadgets and smartphones.

There are other options as well that exist such as a tenure extension. This may ease you from the heavy EMI burden, but you may just end up paying a hefty interest on the loan. Moreover, a longer tenure means that you may end up repaying the loans till your retirement years when savings should be kept handy. However, if you may have already paid off a substantial amount of your principal, opting for a loan extension may seem like a good idea — to ease your financial commitments.

Word of caution — Do not forget to consult your financial advisor before exercising any of the options given above.

(By Atul Monga, Co-founder & CEO, Basic Home Loan. Views are personal)

2024-02-21T15:29:59Z dg43tfdfdgfd