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Buying a new home entails not only a huge financial investment, but an emotional one too. When an average person invests in a residential real estate property for the first time ever, they often have to avail themselves of a housing loan to make it happen. However, along with getting a housing loan – also referred to as ‘home loan’ – comes the daunting responsibility of making EMI payments for a long time. Usually, it takes around 15 to 25 years for most borrowers to repay these loans, depending upon the EMI schedule set forth by the lender.
But if one desires to be free of debt as soon as possible, it is advisable to repay home loans at the earliest, if you have the means for it. We at L&T Realty, India’s reputed real estate developer, have compiled the following guide to show you how you can do that:
1. Making the maximum down payment possible
It would be wise to make as much down payment as possible on your housing loan, as opposed to taking the maximum amount of loan that you are eligible to avail. Are you aware that this step can greatly bring down your principal loan amount? Ultimately, this will also help lower your interest and thus reduce your EMI burden.
Words of advice – You should consider making down payments of 20 to 25 percent or above for easier repayment of home loans, provided it is feasible for you. Moreover, you may also consider liquidating other investments that aren’t giving you the expected ROI, to ease your future debt burden.
2. Finding a lender who offers low interest rates
Whether you’re thinking of purchasing a home at L&T Veridian at Emerald Isle, or checking out L&T Centrona price or that of any other property, we can tell you that there’s no dearth of institutions offering loans to homebuyers, from housing finance companies to banks. But before you choose a lender, it is extremely important to do adequate research and comparison to discover the one that will give you the best value through low interest rates. When the rate of interest is low, it helps you settle your dues quicker because it also lowers your repayment amount as a whole.
Words of advice – Say you’ve already availed a housing loan with a greater interest rate. In this case, you may opt for a home loan balance transfer to get lower interest rates and better terms. By doing this, you can significantly reduce your total interest outgo.
3. Choosing a lender who also charges lower fees
Your choice of lender shouldn’t be based solely on the home loan interest rates they are offering. You must also take into account the other fees they will be charging you. These fees comprise late payment charges, processing fees, as well as other hidden charges. If your lender charges you less on these other fees, it can prove to be quite beneficial for your home loan repayment.
Words of advice – Always try to make your EMI payments on time to avoid having to pay late payment charges, as these charges often tend to be rather high. Also, delays in repayments can have an adverse effect on your credit score, which may lead to your housing loan applications being rejected in the future.
4. Increasing your EMI amount
There is always a possibility that your income increases, or you get an increment or a higher salary package – at any point in the aftermath of securing a home loan. This situation can make you financially capable of paying more EMI, which can help you pay off your loans faster.
Words of advice – To benefit from a rise in income or salary, you can contact your lender and suggest paying more EMI within a relatively shorter loan tenure. Salaried individuals can repay their home loan much faster in this manner, because even a slight increase in the EMI amount can considerably shorten the loan tenure.
5. Making part-payments on the housing loan
This tip is one of the finest ways to lower your home loan by a significant measure. The reason for this being that, for housing loans with floating interest rates, lenders don’t charge for a specific amount of the part-payments on them. But this varies from lender to lender, so always remember to verify the pre-payment conditions of your lender, as some of them may not charge anything at all, while others might charge after you pay off a certain amount or make a particular number of part-payments.
Words of advice – Obtaining surplus funds in the form of salary hikes, gifts, bonuses, or any unexpected extra income may tempt you to splurge on things of secondary importance. But ideally, you should use these funds to make part-payments on your housing loan.
6. Selecting the home loan tenure thoughtfully
You must put in a lot of thought while choosing your home loan tenure. Opting for a shorter tenure and making higher EMI payments can help you clear your dues faster, as you need to pay a lesser amount as interest.
Words of advice – Be practical. You shouldn’t forget that a shorter loan tenure will also heighten your EMI burden. In case you are unable to pay your EMIs for some reason, you will be levied charges for the delayed home loan repayment, which will get reflected in your credit report for many years. So, if you do not have the means to afford higher EMI payments in a shorter loan tenure, it is recommended to go for a longer tenure which will let you easily repay EMIs, or pre-pay when you have extra funds.
7. Taking steps for maximum tax savings
You can derive tax benefits up to INR 2 lakhs annually on your home loan interest payments, under Section 24B of the Income Tax Act, 1961. Striking the right balance between housing loan amount and tenure can not only help in faster repayment, but also deliver the best tax savings. Did you know that choosing a high loan amount and the longest tenure can offer maximum tax savings?
Words of advice – Longer loan tenure also implies a longer period of debt outstanding and higher total interest outgo, which means that you may end up spending more on interest payments than you would earn from tax savings, since the maximum tax saving limit is set at 2 lakhs under Section 24B. Hence, you must always compare the net interest rate after taking the tax saving benefits into consideration, to achieve the appropriate amount-tenure balance.
To get lower interest outgo and more savings, you may reduce your loan outstanding using partial prepayments, such that the annual interest gets closer to the INR 2 lakhs cap. Shorter tenures lower interest costs and help you repay your home loan faster, but you will be left with unused tax savings if the annual interest outgo becomes lower than INR 2 lakhs. However, this residual saving can be utilised if you intend to upgrade your home or invest in another one.
(Source: Economic Times)
8. Taking advantage of the plunging interest rates
Interest rates on loans fall when the Reserve Bank of India cuts the repo rate. To benefit from this situation, you may either reduce the home loan tenure or reduce the EMI.
Words of advice – Preferably, reduce the loan tenure and not the EMI. Keep EMI the same or increase it if financially possible for you, as it helps in faster clearance of your debt.
Faster home loan repayment has multiple advantages to it that help reduce your financial stress. When you clear your dues earlier, you can use the free money for meeting other needs – be it for reinvesting, to build a retirement corpus, your child’s higher studies or marriage, or even for splurging on vacations!