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Tuesday, April 23, 2024

Detailed Guide on Repaying Your Home Loan Faster

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Home loans, whether through private banking sectors like HDFC, Axis Bank or ICICI Bank or public banking sectors like SBI Home Loan, Bank of Baroda, Punjab National Bank etc., come with simple processing steps. However, availing of a home loan and ensuring to prepay it are 2 distinct things.

Maintaining a healthy track record when repaying your home loan has a positive impact on the individual’s credit score. But home loan tenures range anywhere from 20 to 30 years; it can be extremely challenging to continue with such repayments each month over an extended repayment tenure. Also, while home loan interest rates are lower as compared to personal loans, higher repayment tenures make interest constituents appear bigger. Hence, it is best to repay such home loans faster. Listed here are a few ways to repay your home loan quickly –

Repay A Higher Home Loan EMI

You must always go for a higher home loan EMI from the beginning. Instead of selecting an EMI comprising 20 – 25 percent of your income (monthly), you can choose a 40 percent contribution. For example, if you are earning every month Rs 1 lakh, then you can fix your monthly EMI to Rs 40,000 instead of Rs 20,000. It will assist you in lowering your principal component on your outstanding balance faster and even save you from the extreme burden of repaying your interest for a longer time period.

A home loan equaling Rs 50 lakh for 15 years at an interest rate of 9 percent will cost you an overall amount of more than Rs 91 lakh, with interest constituent alone being more than Rs 41 lakh with EMI summing to Rs 50,000. However, in this case, if the loan EMI is enhanced to approx. Rs 60,000, you can easily reduce your interest constituent to around Rs 29 lakh, and repayment tenure can be lowered from 15 to 11 years. For such calculation, ensure to use the SBI Home Loan EMI Calculator.

Just by deciding to repay your higher loan EMI from the beginning, you will be able to easily maintain a good and steady pace towards home loan repayment. Also, you will be able to finish your repayment schedule in a shorter period than lower EMI repayment tenure.

Conduct Regular Part Prepayments

As home loans generally availed for a higher repayment tenure, you can expect an enhancement in your income over some time. With income enhancement, you can select to even make regular loan repayments. Part prepayments assist in lowering the principal component with which you can choose to lower your repayment tenure.

With every part prepayment, your funding partner permits you to either lower your EMI component or lower the loan repayment tenure. When selecting to repay your loan quickly, it is better to select reduced repayment tenure instead of reduced EMI constituent. Additionally, to enhance your income over time, you even can use the bonuses or additional income during loan repayment tenure to make the prepayment. For example, let’s assume you availed a home loan equaling Rs 1 crore for a repayment tenure of 30 years at a rate of interest of 7 percent p.a. In such a case, you do not require opting for any kind of part prepayment during the repayment tenure and assume the rate of interest stays constant during the entire loan tenure. In such a situation, you would end up repaying nearly Rs 2.4 crore over a span of 30 years. However, in the case you pay Rs 2 lakh towards the end of the 3rd year, your overall amount paid may go down to Rs 2.29 crore. In simpler terms, a part prepayment equaling Rs 2 lakh towards the end of the 3rd year will end up saving considerable, i.e., an overall sum of Rs 11 lakh and even reduced repayment tenure.

Regular part prepayment throughout the loan repayment tenure assists in lowering your interest constituent as well as loan repayment tenure. You can utilize annual bonuses to make such prepayments daily. Moreover, any inheritance or financial gifts can even be used to make a part prepayment.

It is recommended you check up if your home loan has any prepayment charge attached to it. In the situation of floating rate home loans, RBI (Reserve Bank of India) has mandated that the financers cannot charge any kind of prepayment penalty. Subsequently, it is important to even keep in mind that part prepayment must not come with any cost of any other financial commitment like your child’s higher education expense, emergency fund etc.

Opt For A Shorter Repayment Tenure

It is better you opt for shorter repayment tenure from the beginning of your loan period instead of opting for a higher repayment tenure which costs you higher on the area of interest component. A shorter repayment tenure assists you in repaying the principal component along with a lower interest constituent. Ensure to note that a shorter repayment tenure will need you to cough up a higher repayment EMI than longer repayment tenure.

Let’s understand it better with the assistance of an instance – A loan equaling Rs 30 lakh require you to repay a monthly repayment equaling Rs 27,000 at the rate of interest of 9 percent p.a. for 20 years. In such a case, you will repay Rs 35 lakh as an interest component, with the overall amount to be paid being Rs 65 lakh. In another scenario, where the loan equals Rs 30 lakh availed for 10 years, the EMI component will go down to about Rs 38,000, the interest component would lower to Rs 15 lakh, and the overall amount to be repaid equals Rs 45 lakh. Thus, by lowering the repayment tenure by ten years, you will end up paying additional proceeds equaling Rs 11,000 for ten years. However, that would save a whopping interest payment of Rs 20 lakh.

Repaying the loan in short repayment tenure also endows you with the choice of availing of higher debt later in the case if any requirement comes up. Also, it would enhance your credit score.

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