A home loan is a blessing when it comes to buying the house of your dreams. However, the high interest rates can add up to almost double the amount of your loan, even if your EMIs seem low. A smart financial strategy would involve a plan to recover the interest paid on the home loan EMI so that you have more savings at the end of the day.
There are number of ways you can save money on your EMI and reduce the interest paid on your home loan. Here are some of them:
A Systematic Investment Plan in equity funds is an effective way to save money every month which can then be used to foreclose the loan. Saving just 10% of your EMI amount in a SIP throughout the tenure of your home loan, assuming a good average annual return, will leave you with a lumpsum amount that is sufficient to either pay off a portion of your loan or use as a retirement fund.
Making regular prepayments before the home loan tenure is over can help to reduce your interest payments considerably. Each time you get a surplus amount from maturity proceedings from investments, bonuses, trust funds, gifts, etc., use it to make a prepayment on your home loan and you will save even more on your interest payments.
If you have been paying your EMIs regularly and on time, and have a longstanding relationship with the bank, you could negotiate for lower interest rates. Check out: Lowest Home Loan Interest Rate all banks
You have the option of transferring your home loan to a lender with lower interest rates. This is called refinancing your loan. It is important to research and compare interest rates among various lenders before you decide to refinance your loan. There is also a nominal conversion fee to be paid to your existing bank or lender. Keep these transaction costs in mind before refinancing your home loan.
The majority of banks offer up to 90% of the property’s value through the home loan. However, instead of making the minimum of 10% to 20% as down payment, it would be wise to contribute a larger amount out of your own savings. The Loan-to-Value (LTV) ratio is lower when your down payment is higher. This will also increase your loan eligibility and chances for approval. Check out: How to Compute Home Loan EMI
Your home loan account will have an overdraft facility. Through this facility, you can deposit an additional amount at any point in time, which is apart from your EMI amount. This is taken as a prepayment till it is withdrawn. You can withdraw this amount at any time, but keep in mind that doing so will increase the outstanding balance and thereby, the interest payments on your loan. If you regularly deposit additional payments in the overdraft facility of your home loan account (such as bonuses), then your loan tenure and interest payments are reduced.
Choose from one or more of the options listed above to recover or reduce the interest paid on your home loan to help you save both money and time.
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