How to Repay Your Home Loan Quicker and Save Interest Expense?

Who does not want a place to raise a family and retire happily? Of course, everyone does. And, owning a home is a must for this. 

Living in Mumbai, everybody dreams to own a 2bhk flat in Mumbai to lead a peaceful life. But getting a home in a metropolitan city calls for a lot of investments.

To make their dream happen, the buyers are opting for home loans. Although this is a smart way of purchasing, one has to pay interests on the loan amount.  And, sometimes, the repayment may pose to be a heavy burden.

This blog gives some tips for smooth sailing through the repayment process.  Scroll down for details!

1. Take the Loan From a Bank That Charges the Lowest Interest

The rate of interest charged by different banks varies. So, you must do enough research to pick the bank or other financiers that charge a lower rate. Contact as many banks as possible and compare the rate of interest they are charging.  

Do not ignore even if there is a slight difference in interest rate. This can turn into a substantial amount over a long tenure.

2. Always Try to Manage Your Funds

Buying a home is the most important and valuable investment one makes in life. Still, there are many other things that you can never ignore. So, you must manage your fund judiciously. 

Always try to maintain a low ratio of the debt and your income. The thumb rule is that your monthly repayments should not be more than 50% of the earning per month. This will let meet the other necessities and pay comfortably.

3. Never Fail to Pay the EMI

Make timely payment of the EMI a priority. Try to schedule it with the payment day to avoid the chances of defaulting. Remember that failing to pay the EMI attracts penalties. 

4. Opt for a Short Tenure to Move Out Quickly

The owners of the homes generally hold it for a long time.  The borrowers tend to opt for a long tenure for getting a low EMI.  But this ultimately gives the opposite effect as the borrowers end by paying more amounts on interest.

Choosing a short tenure is a great way to repay the home loan quicker. As you repay the loan faster, you also pay less as interests. In such cases, you repay the Principal much faster. When you repay the principal amount, it also lowers the absolute interest. So, you make savings on the interest burden.

5. Make Lump Sum Pre-payment

The banks will never ask you to repay the loan. It is against their interest. But the more time you take to repay, the more interest you pay.  Maybe you got a bonus, received an insurance maturity benefit, or got dividends from stocks. Use these to lower your burden. Paying a lump sum amount will reduce the Principal and you will be able to come out of the home loan earlier.

6. Try to Pay More Than the Emi Amount

In some months you may have a better cash flow due to payments received from other sources. When this happens, pay more than the EMI amount. The surplus payment will reduce the outstanding principal. It will help you make faster repayment and lower the burden of interest.

7. Pay One More Emi Every Year

Always, try to pay one more extra EMI in the year.  Although this may seem tough initially, this gives very good dividends in the long run. Usually, the banks do not charge anything for loans with a floating rate of interest. When one continues for a period of 10 years or more, the impact becomes substantial.

8. Increase the Emi Every Year

Increasing the EI amount every year is a smart way to reduce the interest burden and faster repayment. Better, align it with your annual increment or any other scheduled annual incomes. This will not disrupt your cash flow and let you release the loan and interest burden quicker. 

9. Refinance at a Low-interest Rate

Sometimes Lenders lower the home loan interest rates.  Always look for banks and financial institutions offering a lower rate of interest. Refinancing the home loan at a low rate can prove to be a smart choice for reducing the burden.  But always consider the charges and fees involved for transferring the loan.

10. MCLR Could Be a Good Option

If your home loan is taken before April 2016, you may bring that under the Marginal Cost of Funds Based Lending Rate (MCLR). It lets borrowers benefit from changes in rates. But be sure that it remains beneficial after paying the conversion charges.

FAQ's About Home Loan

  • For what purposes one can take a home loan?

One can seek it for buying a home or flat and also for renovation and repairs.

  • How do the banks decide loan eligibility?

The banks assess the repayment capacity of the borrower on the basis of monthly income.

  • What are the different interest options?

Banks sanction home loans based on either fixed rate of interest or floating rate of interest. In case of the fixed rate, the EMI remains the same throughout the tenure. For floating rates, the interest and EMI change with fluctuations in the interest rate.

  • How the tenure affects EMI?

The amount of monthly EMI becomes less with a long tenure.  But it means paying more interest and the loan becomes costlier.

  • What is the right strategy to take home loans?

One should not hurry and take ample time to shop around. Comparing different rates and seeking clarification helps to get the best deal. 

  • Is it possible to repay ahead of the schedule?

Yes. Most banks allow this.

  • Is any tax benefit available?

Yes.  You can avail tax benefits on both principal and interest as per Income Tax Act, 1961.

Conclusion

The above gives you strategies that work well. Now that you have the insights before you, start following them. This will give you a great relief by saving the burden of interest and by repaying the much quicker.