A home loan helps people accomplish the dream of buying a
house. But it is a long term liability that stays with them for decades. Hence
the house loan interest rates is the most critical factor that people consider
before taking the home loan. Even a slight difference in the rate offered by
various banks and FIs can translate into significant differences in the
interest pay out. Another factor that the home buyers consider is the EMI that
they need to pay. Home loan EMIs make up 30-40% of the monthly expenditure. It
is indeed a huge financial burden that weighs heavily on one’s monthly budget.
To ensure that this expense remains affordable people choose long repayment
tenure. Though it reduces their monthly outflows, their total interest pay out
increases. Here are some tips that you can follow to reduce the interest cost
on your home loan from any housing finance company or leading lenders like HDFC
home loan or SBI home loan.
Shorter tenure
If you choose shorter loan tenure, the principal amount is
repaid much faster. As the interest is calculated on the outstanding loan
amount, quick repayment results in lower absolute interest pay out. A longer
tenure increases the absolute interest amount even though the effective house
loan interest rates remain the same. This happens because most of the EMI
amount goes towards interest payment in the initial years. Since very little
principal is repaid the interest on the high principal amount is more.
While choosing the loan tenure and the EMI amount remember
to keep affordability as the prime factor of consideration. Choose tenure where
the EMI is only as much as your monthly income permits. If in an attempt to
reduce the tenure the EMI becomes more than what you can easily pay, you may
soon get into debt trouble.
Pay an extra EMI every year
In case your monthly budget does not allow you to increase
your monthly EMI amount to reduce the loan tenure, there is another way out.
You may consider paying 1 extra EMI every year over and above your existing installments.
You may use your annual bonuses or other savings to make this repayment. For
example if you pay an extra EMI of Rs 45,435 (on your loan of Rs 50 lakhs taken
@ 10% for 25 years) you will be able to pay the loan fully in 19 years and 1
month.
Increase EMI by 5% every year
Another smart choice to reduce your interest burden is to
increase your EMI amount by 5% every year. Considering that you will get a
salary hike of 5% every year, this will not be too taxing on your monthly
budget. You will be able to repay the loan much faster and gain significant
savings on the interest cost.
Refinancing
If you are an existing borrower, refinancing your home loan at
lower house loan interest
rates can help in reducing the interest cost. You can keep looking for
better offers from other financial institutions. If there are banks that are
ready to offer you a loan at a lower house loan interest rates then you may
consider switching. A reduction in the house loan interest rates from 10% to 9%
(on a home loan of Rs. 50 lakhs taken for a period of 25 years) lowers the EMI
from Rs. 45,435 to Rs. 41,960. With a saving of Rs 3475 per month you are able
to lower your interest pay out by Rs 10.42lakhs.
However you need to take into account the prepayment penalty
and other legal charges that may be levied by the existing lender as well as
the processing fee for the new loan. The savings achieved due to the lower rate
should justify the additional costs involved in refinancing.
Switch to MCLR
All home loans taken after April 1, 2016 are linked to the
bank’s MCLR. You can switch from a base rate to MCLR which allows you to gain
the benefits of changes in house loan interest rates faster. For this
conversion, banks usually charge a conversion fee of 0.5% on the outstanding loan
amount.
It is always beneficial to reduce your interest cost burden.
The above tips can be used to lower the interest pay out. But remember to
choose an option that suits your monthly budget. Failing to pay the installments
on time can have serious negative consequences. Hence affordability of the EMI
should be the key deciding factor to avoid future financial troubles.
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