Time is money, literally, when it comes to paying off your home loan. Read on to know how prepaying your home loan can help you save a substantial amount
Homebuying is an overwhelming process; the amount transacted is in several lakh and more often than not, takes up almost all the savings one has. Add to this the fact that processing your home loan is also a long process, which requires thorough documentation. And after all of this, you have a hefty EMI to pay the very next month.It is but natural that most people thus opt for a lengthy home loan tenure to have minimum EMI burden from the very get-go. “However, they do not realise that longer the loan tenure, higher is the interest amount paid. Therefore, to minimise the interest cost and get out of debt faster, one must look at ways to clear the liability as soon as possible,” says Deepak Jasani, head, retail research, HDFC Securities. Pre-paying a home loan is thus the way to go. Pre-paying does not just help you reduce your loan tenure, but also helps you save a substantial interest amount.
How can you close the loan early? Here are a few ways:
Use the windfall to part-pay Whenever you get a lump sum amount – bonus, inheritance, return on investments – divert it towards making part pre-payment. “This could go a long way in reducing the total interest outgo and the tenure of the home loan,” says Jasani. It is thus key that you plan your pre-payments right. “Find an investment instrument that works for you and let your money earn some returns. At maturity, use the amount saved with these investments to part pre-pay your home loan and reduce your loan burden at the earliest,” opines Pranjal Kamra, CEO, Finology Ventures.
If a lump sum is not possible, you can make smaller payments over and above your regular EMIs.
“As pre-payments are reduced from your principal directly, paying back regularly reduces your principal amount while also reducing the interest levied, thus decreasing your loan tenure,” explains Gaurav Mohta, chief marketing officer, HomeFirst Finance.
“For example, if Rahul takes a home loan of Rs 50 lakh for a 20-year tenure, at an interest rate of 6.8 per cent, his total interest would be Rs 41.60 lakh. However, if he pre-pays just Rs 5 lakh in the first couple of years of this tenure, his total interest payment would come down to Rs 29.58 lakh – a saving of Rs 12.02 lakh,” explains Jugal Mantri, executive director and CEO, Anand Rathi Global Finance.
Career growth incentives As you grow in your career, your income will also increase. Accordingly, increase your EMI amount. So taking Rahul’s example, if Rahul increases his EMI payment by just 10 per cent each year, his total interest payout will come down to Rs 22,73,680.
“A few lenders also provide EMI wavier to eligible borrowers wherein a set of EMIs is waived off during their loan tenure – each after the third, sixth, ninth, and twelfth year at no extra cost. This offer is applicable to borrowers who have a good payment record. It is thus advisable that borrowers enquire about such offers; however, also ensure that there are no hidden charges while availing such products,” informs Jairam Sridharan, MD, Piramal Capital and Housing Finance Limited. The amount that you save because of such offers should be rerouted to pre-paying your loan.
Refinance whenever possible Interest rates fluctuate over time. “If interest rates have reduced and you had taken a home loan a few years ago, then it is likely that you are paying a higher interest rate. If the gap between your interest rate and the market rate is substantial, then you may look at re-financing your loan,” suggests Jasani.
You can approach your existing lender and ask him to lower your rate or you can transfer the loan to another lender who will give you better rates.
However, before you do this, evaluate the prepayment penalty, transfer and processing costs, to ensure that this is a financially viable move.
Did You Know? “As per the RBI guidelines, banks/housing finance companies are not allowed to levy any prepayment charges/penalties on floating home loan rates. Prepaying a part of the loan may result in substantial financial savings for an individual by reducing the overall interest payable (by the individual) and reducing the tenure of the loan,” informs Suresh Surana, founder, RSM India.
Source - Times Property