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.
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.
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