Taking a home loan and paying it off is the biggest financial achievement we make in our lifetime. The huge debt burden and the long duration are the two daunting aspects of home loans. However, with some intelligent planning you can pay off your loan and become debt-free much sooner than you had imagined. There are four easy ways to getting rid of your home loan!
For this article, let us assume you have taken a home loan of Rs. 50 lakh for 20 years at an interest rate of 10.10% per annum. Read on to know how various methods can reduce your loan tenure:
1. Increase your EMI as your salary goes up
Your income plays a critical role in deciding your EMI amount when taking a home loan. However, you can change your EMI structure later as your salary increases. Setting aside just 10% of your hiked salary to pay a higher EMI will work wonders in reducing your loan tenure. Lower EMIs may be attractive in the short term but they lead to an increased interest amount at the end of the loan tenure.
Let’s assume that the 10% increase amounts to Rs 2,500 each month and you include this amount to your existing EMI. In this scenario, your loan tenure will reduce to 200 months from the existing 240 months, effectively reducing your tenure by 3 years and 4 months.
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2. Maintain your EMI despite drop in interest rates
Do not reduce your EMI amount if there is a drop in the floating interest rate of your home loan. Instead, capitalize on this opportunity by continuing to pay what you were already paying and reduce the loan duration.
Also Check: Home Loan Eligibility
3. Make part prepayment
A substantial portion of the EMI goes towards interest payouts during the initial 5–8 years. Any loan prepayment leads to a reduction in the principal amount, which, in turn, reduces your interest component. Use a portion of your annual bonus or any windfall gain that comes your way to make loan prepayment.
In the current scenario, at the end of the tenure, your total interest payable is approximately Rs 66.6 lakh. Now suppose you make one part prepayment of Rs 3 lakh after two years of taking the loan. This payment will reduce your repayment tenure by 3.7 years.
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4. Consider loan refinancing or balance transfer
Getting your loan refinanced (also known as home loan balance transfer) through another bank that is offering lower interest rates is a good idea. This will reduce your loan repayment burden substantially.
Related Post: What charges are applicable when you transfer home loan from one bank to another?
Taking the earlier example, refinancing your home loan at 0.5% less than the original rate of interest will reduce your repayment tenure by 1.5 years on a 20-year repayment plan.
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