How to repay your home loan faster

A detailed guide on paying home loans faster

The availability of home loans has simplified the process of owning a home for many individuals, today. However, taking a home loan and maintaining a good track record of pre-paying a loan are two different things.

Maintaining a good track record when repaying a home loan can have a positive impact on the credit score of an individual. But tenures for home loans range from 20 to 30 years; and it can get challenging to continue paying EMIs each month, over such an extended tenure. Also, while interest rates for home loans are lower than personal loans, the longer tenure makes the interest component appear larger, to an individual.

Hence, it is better to pay off these home loans faster. Here are some ways to pay a home loan faster:

1. Pay a higher EMI
You can always opt for a higher EMI from the very start. Rather than choosing a home loan EMI comprising 20-25% of your monthly income, you can opt for a 40% contribution. For instance, in case you are earning 1 lakh per month. You can set a monthly EMI at Rs. 40,000 rather than Rs. 20,000. This will help you reduce the principal amount on your outstanding loan faster and save you from the burden of paying interest for a longer period.

A home loan of Rs. 50,00,000 for 15 years at 9% interest will cost you a total of over Rs. 91 lakh with the interest component alone being over Rs. 41 lakh with an EMI of Rs. 50,000. However, in case the EMI is increased to Rs. 60,000, you can reduce the interest component to Rs. 29 lakh, and the loan tenure can be reduced from 15 years to 11 years.

By deciding to pay a higher EMI from the start, you would be able to maintain a steady pace towards repayment of your home loan. You would also be able to complete the repayment schedule in a shorter period as compared to a lower EMI tenure.

2. Make regular part pre-payments
As a home loan is normally taken for a longer tenure, an individual can expect an increase in income over some time. With the rise in income, you can choose to make regular pre-payments. Part pre-payments help in reducing the principal amount with which you can opt to reduce the tenure.

With each part-prepayment, your financing partner allows you to either reduce the EMI amount or reduce the tenure of the loan. When choosing to pay off the loan faster, it is better to choose reduced tenure, rather than a reduced EMI amount.

In addition to the increase in income over some time, you can use your bonuses or any additional income during the loan period, to make a pre-payment.

For instance, let's assume you have taken a home loan of Rs. 1 crore for 30 years at an interest rate of 7%. In case you do not opt for any part prepayment during the loan tenure and assume the interest rate remains constant during the whole tenure, you would end up paying Rs. 2.4 crore over the 30 years. However, in case you paid Rs. 2 lakh at the end of the third year, your total amount paid can reduce to Rs. 2.29 crore. In other words, a part pre-payment of Rs. 2 lakh at the end of the third year would end up saving you a total of Rs. 11 lakh in addition to reducing the loan tenure.

Regular part pre-payments across the loan tenure help reduce your interest component and loan tenure. You can use annual bonuses to make these pre-payments regularly. Additionally, any inheritance, financial gifts, etc. can also be used to make part pre-payments.

It is better to check if your home loan has any part pre-payment penalty. In the case of floating loans, the RBI has mandated that financers cannot levy any part pre-payment penalty. At the same time, it is equally important to keep in mind that your part pre-payment should not come at the cost of other financial commitments like emergency funds, children's education, etc.

3. Select a short tenure
It is better to go for a shorter tenure from the very start of the loan period rather than going for a longer tenure which will cost you more in the interest component area. A shorter tenure helps you pay back the principal amount along with lower interest. Keep in mind that a shorter tenure will require you to cough up a higher EMI as compared to a longer tenure.

Let us understand this better with the help of an example: A loan of Rs. 30 lakh will require you to pay a monthly EMI of Rs. 27,000 at an interest rate of 9% for 20 years. In this scenario, you would pay Rs. 35 lakh as interest with the total amount paid amounting to Rs. 65 lakh. In another scenario wherein the loan of Rs. 30 lakh is taken for 10 years, the EMI amount would go up to Rs. 38,000 and the interest amount would reduce to Rs. 15 lakh and the total amount paid will stand at Rs. 45 lakh. Therefore, by reducing the loan tenure by 10 years, you would end up paying an additional amount of Rs. 11,000 for 10 years but that would save you a whopping Rs. 20 lakh in interest payments.

Paying back a loan in a short tenure also gives you the option of taking more debt later in case any requirement arises. This will also give a boost to your credit score.

It is important to keep in mind the kind of flexibility your income allows and opt for an EMI that doesn’t eat into your regular expenses. The last thing you want is that in your desire to become debt-free, you would have to stretch your finances to not be able to meet your other commitments.

4. Transfer your home loan
At the time of taking the loan, you would compare the home loan rates offered by various lenders and opt for one that is offering you competitive interest rates and good service. This will ensure that your EMIs are affordable.

However, there could be a scenario where you find that you are paying a higher interest rate and a lender is willing to charge lower in case of a switch. You can always opt for a home loan balance transfer and enjoy lower interest rates and other benefits.

Home loan balance transfer helps you in lowering your interest rate, thus helping you pay your home loan faster as you would have more funds at your disposal, which you can use for part pre-payments a few months down the line.

For instance, as mentioned, a loan of Rs. 30 lakh for 20 years would attract an EMI of Rs. 27,000 at an interest rate of 9%. However, if the interest rate is reduced to 8%, the EMI would come down to Rs. 25,000.

It is best to ensure that your home loan EMI amount is the same, after you plan a home loan balance transfer. This would help in reducing the loan tenure, so you can settle the loan in a shorter period.

At Poonawalla Housing Finance, you can transfer your existing home loan at an attractive interest rate starting at 9.55% per annum. We offer additional loan amounts, up to 30 years of loan tenure, and complete transparency with no hidden charges.

5. Maintain a solid payment record
For you to be able to pay your home loan faster, it is important to maintain a solid payment record and to not miss out on any EMI, for any reason. There are various other reasons why you should maintain a solid payment record which can be highlighted as follows:

  • As these loans are tied to your credit profile, you need to keep sufficient liquidity so that you do not default on any of the EMIs. Any default in the home loan EMI will result in a lower credit score.
  • Any default in monthly EMIs will attract penal charges which could range from 2% to 4% plus applicable taxes across lenders, which can further strain your monthly finances.
  • The credit report also reflects any delay or defaults made by you in the monthly EMIs. This will act as a challenge when it comes to taking fresh debt.

To avoid any such challenges and to keep a solid credit record, you need to maintain a good track record of repayments which will eventually help you in clearing the loan faster as compared to a scenario of defaults and delays.

6. Increase rental income
Depending on the end use of the property; you can look at renting out your property partially, or completely, as per your convenience. This will help you generate an additional surplus which can then be used for making part pre-payments. This will also help you in ensuring that you do not default on any of the monthly EMIs as you would have additional funds at your disposal.

In case you have bought a multi-storey house, you can always rent out a few floors that will generate additional funds for you. In case you have bought a single-storey house, you can always look at renting out a portion of the house to generate rental income.

Renting out will only make sense if you have some spare space that is not utilised in the property that you have bought. Do not opt for renting out a floor or part of the floor in case you are already utilising the space and end up creating a space crunch for yourself.

These are some of the popular ways with which you can pay off your home loan faster. Most of all, it is important to select a lender that you can trust and can provide reliable service. Poonawalla Housing Finance is known for its hassle-free application process with minimal documentation and offers a flexible repayment schedule along with end-to-end doorstep service with a dedicated relationship manager at your doorstep.

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