Tips to Reduce your Interest Burden While Repaying Home Loan

  • Choose a shorter loan tenure. As mentioned earlier, a shorter loan tenure ensures the complete loan repayment faster; resulting in lower interest cost. You must understand that higher interest payout does not necessarily imply a higher effective interest rate. What increases with the increase in loan tenure is only the absolute interest payout increases with the increase in loan tenor. With a smaller loan tenure, the principal amount is repaid much faster. As interest is calculated on outstanding principal amount, quick repayment of the principal amount leads to lower absolute interest payout.
    • To ensure a lower interest payout, decrease the interest rate of your loan. If you have already availed the loan, you can go ahead and refinance your loan at a lower interest rate.
    • Ensure quick repayment of the principal amount. The lesser the principal amount (owing to faster repayment), the lesser the interest amount to be repaid.
    • If you can, then pay more than the regular EMI. The surplus amount will not only reduce your principal outstanding, but also your interest burden.
    • You can also pay one more EMI (than the usual number of EMIs) every year. This is an effective trick to reduce your loan tenure, and in turn the interest cost.
    • Increasing your EMI amount by 5% every year is definitely a smart choice to reduce your interest repayment burden. You can align this increase with your increase in salary or receiving any other annual bonus. If you can combine the two, i.e. pay one additional EMI every year, along with increasing your EMI amount by 5% every year; the interest burden will reduce significantly, You can use EMI Calculator to calculate monthly EMIs easily.
    • Keep looking out for lower interest rate offers. Before availing a home loan ensure that you do thorough research and choose the financer offering the lowest interest rate. In case you have already taken a home loan and want to reduce the interest rate now (usually banks do not pass on interest rate cuts to the existing borrowers), then go for another bank/financial institution who might be willing to offer you a loan at a lower interest rate. Hence, refinancing your home loan at a lower interest rate can prove to be a great decision in reducing your interest repayment burden. Do not forget to take into account the charges for switching the loan such as processing fees, legal fees etc. before going ahead with it.
    • Remember to go with the EMI amount that you can afford. Though it is true that a shorter loan tenure will lead to lower absolute interest payout, it will also increase your EMI burden. Hence, always remember to keep affordability as a primary factor when choosing your loan EMI amount.
    Calculate your EMI

    How to reduce home loan interest?

    As an adult, most of us dream of owning a home of our own where one can start a family or retire peacefully. Purchasing or building a home is a huge undertaking as it involves a lot of investment. In order to purchase a dream home, many rely on low-interest rate home loans from the banks or housing finance companies. The principal amount of a home loan is comparatively higher than a car loan or a personal loan. Therefore, repaying a home loan through Equated Monthly Installments (EMIs) over a fixed period of time can be taxing for a borrower.

    What's more, if the home loan EMI exceeds more than 50% of a person's income, then he or she will not have sufficient money left to pay the monthly bills or invest in other things. Which is why, financial experts always advise borrowers to maintain a low debt-to-income ratio wherein a person's loan EMI is less than 50% of his or her income. So, how does one ensure his or her home loan EMI and interest payments remain affordable? Since interest is calculated based on the outstanding principal amount, making higher EMI payments can help one repay the home loan quicker and also save on interest payments.

    Investing in a home guarantees higher returns as the property is usually held by the owner for a longer period of time. In a bid to get a lower home loan interest rate and EMI, borrowers tend to opt for a longer loan repayment period. This can have a reverse compounding effect wherein the individual is stuck paying more in overall interest payments on his or her home loan. Therefore, opt for a home loan with a short duration so that the loan can be repaid quickly. Here are some valuable tips to repay home loan principal faster:

    • Higher down payment: Making a higher down payment when obtaining a home loan can reduce the principal amount. A lower principal amount means lower interest and EMI payments.
    • Home loan prepayment: If there is an opportunity to prepay a part of the home loan before the end of its tenure, then it can reduce the overall interest payments. Banks charge a prepayment penalty fee for such an allowance.
    • Annual increase in home loan EMI: With the increase in net income every year, a salaried employee can choose to increase his or her home loan (annual) EMI by a small percentage in order to save interest. The increase in percentage must be determined based on the increase in the person’s net income.
    • Extra EMI payment: In addition to an increment, some employees receive annual bonuses which can be used to pay an extra EMI to not only save interest but also repay the home loan faster.
    • Switch to MCLR: Home loans taken after April 2016 follow the marginal cost of funds based lending rate (MCLR) wherein the borrower can benefit from the change in interest rates. Home loans taken before April 2016 can be switched to MCLR, subject to tax and conversion fee. The conversion fee is a percentage of the outstanding loan amount that is yet to be repaid. Therefore, it is advisable to perform a cost analysis to find out if switching one’s home loan to MCLR is beneficial.

    Will home loan refinancing help reduce interest burden?

    A lower home loan interest rate means a lower EMI. In an effort to reduce the home loan interest rate, borrowers usually refinance the outstanding loan amount. Refinancing home loans can be tricky as the loan prepayment fee and other service charges levied by the lender can amount to a higher figure which in turn, results in reduced interest savings. The online home loan EMI calculator that is available on a third-party website or a bank website can be used to find out if refinancing home loan can help one save interest. For example, if the home loan interest rate reduces to 9% from 10% p.a., then the EMI reduces to Rs.41,960 from Rs.45,435 on a home loan of Rs.50 lakh. Thus, the overall savings on interest is Rs.10,42,566 lakh over a loan tenure of 25 years.

    News About how to Reduce your Interest Burden While Repaying Home Loan

    • Car and home loan EMIs to become expensive due to the probable repo rate hike by RBI

      A research conducted by the State Bank of India (SBI) has revealed that the Reserve Bank of India (RBI) is likely to hike the repo rates despite the cooling inflation. The research however, has not been able to predict the magnitude of the hike. As per the SBI report, a rate hike of at least 25 basis points in October 2018 is imminent even though the CPI inflation has come down.

      If the prediction by the SBI were to come true, the rate hike would cause the EMIs on car and home loans to increase. This is because banks hike their lending rates in response to the hike in the repo rate by the RBI. The same does not necessarily happen when the repo rate is decreased. The prediction of the rate hike comes from the weakening rupee which has been stirred due to opinions over different global factors.

      25 September 2018

    • RBI cancels certificate of registration for 17 NBFCs

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      14 August 2018

    • Targeted communication tools used by RBI gets global praise

      The global banking authority, the Bank for International Settlements (BIS) has lauded praise on the RBI for using effective communication strategies. The Bank for International Settlements, called the bank for central banks applauded the RBI for using a targeted communication strategy effectively by using short and simplified language to reach out to the right audience. BIS, which is owned by 60 banks across the globe including Reserve Bank of India in its most recent annual economic report has said that effective communication is a very critical aspect of success, as is the case in many policymaking areas. Proper communication can help explain strategy, policy process and objectives to the public which can help with building political support. This can help the authorities in sharing the risk assessment made with the public as well as the affected parties. This can help in improving the effectiveness, according to the BIS. BIS believes that delivering of the message effectively to the right audience can help in achieving the desired effect. Most of the central banks in general communicate risks in press conferences, speeches and their usual financial stability reviews. While these reviews might useful when it comes to communicating with specialists, these could easily prove to not be very useful to general public. This is a reason why many central banks have started to make use of more targeted channels.

      17 July 2018

    • India Post Payments gives option to de-link Aadhar number

      India Post Payments Bank(IPPB) is now giving an option to de-link Aadhar number to its account holders. This is the first time a government owned entity is providing a choice to its customers on Aadhar. The Payments Bank also gives an option to the customers to open a savings bank account without the use of Aadhar. The customers can opt out from linking their account with Aadhar by submitting a form to the Payments Bank.

      29 May 2018

    • Citibank India launches home loan linked to T-bills

      On 5 March 2018, Citibank launched a first of its kind home loan product that is linked to 3-month treasury bills. The new home loan product linked to T-bills can benefit foreign lenders during the hardening interest rate cycle. Financial Benchmarks India Pvt. Ltd. will publish the 3-month T-bill rate on the 12th of each month. The home loan product will be priced based on this rate which on 5 March stood at 6.27%. The interest rate on home loan will differ with customers, the spread is expected to be 200 bps above the 3-month T-bill rate. This new home loan product is in keeping with the RBI’s liquidity conditions and policy rate. This way, the spread of interest rate for a borrower will remain constant throughout the home loan tenure.

      7 March 2018

    • Central Government offers funding under PMAY-CLSS to lower income groups to purchase homes

      People in the Lower Income Group (LIG) or Economically Weaker Section (EWS) and Middle Income Group (MIG) can opt for financial assistance to purchase homes under Pradhan Mantri Awas Yojana (PMAY), a Credit Linked Subsidy Scheme (CLSS). Applicants with an annual household income of Rs.6 lakh to Rs.12 lakh in the cities come under MIG 1 category while applicants with an annual household income of Rs.12 lakh to Rs.18 lakh come under MIG 2 category.

      The Indian government extends a maximum subsidy of upto Rs.2.67 lakh on a Rs.20 lakh loan amount for 20 years (loan tenure) at 8.5% interest rate which is then reduced to 6.61% home loan interest rate to eligible people through Housing & Urban Development Corporation (HUDCO) and National Housing Bank (NHB), 2 central nodal agencies. Applicants belonging to LIG and EWS households with an annual household income of Rs.6 lakh and below can avail the subsidy as long as they don't own a house in India.

      18 December 2017

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