Own house is an aspiration for lower and middle-income earning groups in the country. A home loan is the most convenient option for this population to buy a house and pay over lifetime. The maximum tenure on a home loan is 30 years which is a major part of one’s life. When you have taken a home loan at maximum tenure, you may be wondering how you can prepay the loan sooner and start focussing on other financial responsibilities.
Here are 6 smart ways which can help prepay your home loans.
Tip #1. Make Part Payment to Chip Away The Loan Tenure
You don’t need to hit a jackpot to prepay your home loan. If you have taken a home loan in the early 20s or 30s, you will be able to close your loan within 8 to 10 years with the savings, increments, bonuses, additional income, etc. You can make a part payment on your home loan which can help cut down the payment towards interest and reduce the loan tenure.
You may now have a question whether all lenders allow you to make part payment. You should check with the lender about the part payment facility before applying for the loan. Also, get to know about the number of part payments that can be done in a financial year.
Tip #2. Use Your Mutual Fund Savings to Make Prepayment
Investing in a mutual fund through SIP can get you a considerable sum of returns after a period. For example, you have a home loan tenure of 25 years for a loan amount of 25 Lakhs. At the same time, you are consistently investing Rs. 5000 each month. After 15 years, you would approximately earn a return of Rs. 24 Lakhs. This huge sum can very well be used for prepaying your home loan which can cut the tenure of 10 years. Isn’t that great? You would now have more time to focus on other financial responsibilities. Investing in mutual funds can also help you save on tax.
Tip #3. Increase Your EMI Amount
If you are currently paying a low EMI with a longer tenure, you may be paying more amount on interest. The longer tenure will make you pay more interest amount. You can contact your lender and request for restructuring the home loan. Opting for a higher EMI can reduce the tenure which in turn can help clear the home loan much sooner.
There are also step up home loans which can be taken by the home loan borrowers to increase the EMI based on the increase in the salary. Under step up home loans, you can become eligible for higher loan amount than a normal home loan which can help you buy your favourite house.
Tip #4. Transfer Your Home Loan Balance to Another Lender for Lower Rate
You may have taken a home loan at a higher interest rate due to lower income or moderate credit score. If you are in a good credit health now with a greater monthly income, you may consider switching the outstanding balance on your home loan to another lender who offers you lower interest rate. This option can help you lower your overall repayment as the interest rate has reduced. Moreover, you have the advantage of restructuring your home loan with respect to the tenure. You can reduce the tenure and increase the EMI to pay off the debt faster.
Balance transfer can work best for you only if you do it at the initial stage of the tenure. For example, you have a loan tenure of 20 years, the balance transfer should be done within the first 2 to 5 years. After having crossed half of the tenure, a switch will bring no benefit to you as you would already have paid a huge sum towards interest. You should also be aware there are processing charges levied by the new lender and prepayment charges by the existing lender.
Tip #5. Investments to Prepay Home Loans
Investment is one of the best options which can give you greater returns at an interest rate equivalent to the home loan interest rate. Later, the returns can be used to prepay your home loan. Let’s say, you earn a monthly income of Rs. 50,000 per month and you are able to save a minimum of Rs.5000 each month. This amount can be used for investing in options such as RD, FD, PPF, Mutual Funds, Stocks, post office saving schemes, etc.
After a term of 5 to 10 years which can be used for prepaying the home loan. You can save a lot by cutting down the interest payment of the loan for the rest of the tenure.
Experts suggest that you must always have 3 EMIs in reserve which can be utilised in case of job loss or emergencies.
Additional Reading: Home loan charges that every home loan applicant should be aware of
Tip #6. Home Loan with Overdraft Facility To Close The Loan Faster
Some of the banks provide home loans with an overdraft account. With this option, the borrower can deposit extra account in the account over EMI which would be treated as a prepayment towards the loan. The surplus amount parked in the account can also be withdrawn when required. If you want to pre-close the loan faster, you may use this option.
When should you prepay your home loan?
For any loan including home loan, the repayment is structured in such a way that for initial period the interest payment outweighs the principal in the EMI. At a later stage of the repayment period, your principal amount will be higher than the interest payment. Hence, you must prepay your home loan at the initial stages in order to save on the interest payment. At the end, you would already have paid a major part the amount towards interest and the principal amount would be higher which is of no use prepaying the loan.
There are also prepayment charges on loans that are taken at a fixed rate of interest. Hence, it will incur additional expense to the borrower. Floating interest type home loans do not carry a prepayment penalty.