Home loans are big ticket long term commitments often extending to as many as 20 years. Did you know on a Rs 50 lakh availed for a tenure of 20 years, you end up paying as much as the principal amount as interest? Home loans make the burden of owning a home easier, but due to the longer tenures of these loans, a lot is spent just in interest cost.
Today we look at how best can you repay your home loan sooner without pinching your pockets too much. Earlier repayment is best explained with the help of an illustrative example.
We will assume all calculations for a Rs 50 lakh borrowed at an interest rate of 9% for 20 years.
Continue paying the existing EMI for the set tenure
According to the initial terms of the loan, the customer pays an EMI of Rs 44986 or Rs 539836 for the year. following this course of EMIs, the customer pays a total interest of Rs 57,96,720 over the entire term of the loan. Even if you want to follow this course, keep your EMIs regular so that you do not attract any late payment/penalty interest on non -payments of EMIs.
Increasing EMIs as and when possible
Suppose for the above-mentioned loan with a remaining balance of Rs 45 lakh, the EMI is increased by Rs 2500 per month to Rs 47,500. The loan can then be paid off in 163 months. The total interest paid on the amount of would amount to Rs 32,54,335 which is a good reduction from the original amount of Rs 40,96,720 if the loan was continued on original terms. So it is good to increase your EMI amount as and when possible. An increment in your income could act as a cue to do so on the EMI front too.
Refinancing the loan
If an opportunity for refinancing the loan comes across, looking at its possibility will also help in easing the burden of repayment. Suppose there is an opportunity to refinance the existing loan to 8.5% interest after the end of 5 years. There is a little benefit here, the EMI goes down to Rs 44,000 and the interest payable over the remaining term would amount to Rs 34,20,288. Refinancing charges are not taken into account here. It is good to know that refinancing as an option works well when there is a possibility of substantial change in interest rate at least a percent or more. Also, weigh in the refinance charges.
Prepaying a portion of the loan when possible
To calculate the benefits of this option let us assume that at the end of 5 years, Rs 2 lakh is prepaid bringing the outstanding principal amount to Rs 43 lakh. In this case, the EMI comes down to Rs 43,200 and also the total interest payable over the remaining tenure would be Rs 34,91,484. Such prepayments can be done in a gap of every few years so that overall interest payment on the loan comes down substantially.
A little bit of planning in the way you handle your finances can go a long way in lessening the home loan repayment burden. Choose the best option for yourself, so you can go home loan debt free at the earliest.
If you are looking to take a new home loan, then check your credit score first and know where you stand with respect to credit and then get the best home loan suited to you.