Choose a shorter repayment term. As mentioned earlier, a shorter loan term guarantees a faster full loan repayment; which leads to lower interest charges. You must understand that a higher interest payment does not necessarily mean a higher effective interest rate. What increases as the loan term increases is only the absolute interest payment, which increases as the loan term increases.
With a shorter loan term, the principal is paid off much faster. Since the outstanding principal bear’s interest, early repayment of the principal leads to a lower absolute interest payment.
As adults, most of us dream of having a home of our own where we can start a family or retire in peace. Buying or building a home is a great business as it requires a lot of investment. To buy their dream home, many turns to low-interest home loans from banks or home financers. The face amount of a home loan is comparatively higher than that of a car loan or personal loan. Therefore, paying a home loan with equivalent monthly payments (EMI) over a period of time can be a burden on the borrower.
When the EMI home loan exceeds 50% of a person’s income, there is not enough money left to pay monthly bills or invest in other things. Therefore, financial professionals always advise borrowers to keep a low debt-to-income ratio when a person’s EMI loan is less than 50% of their income. So how do you ensure that your EMI mortgage and interest payments remain affordable? Since interest is calculated based on the amount of principal outstanding, higher EMI payments can help you pay off the mortgage faster and also save on interest payments.
An investment in a home guarantees higher returns, as the property is typically owned by the owner for a longer period of time. To get a lower interest rate for home loans and a lower EMI, borrowers tend to choose a longer repayment term. This can have a cumulative reverse effect, forcing the person to pay more interest on the mortgage loan overall. So, opt for a short-term home loan so that the loan can be paid off quickly. Here are some great tips to help you pay off your mortgage faster:
Higher down payment: A higher down payment when taking out a home loan can lower your principal amount. A lower principal means lower EMI and interest payments.
Prepayment of the mortgage: While it is possible to prepay part of the mortgage before the term expires, doing so can lower overall interest payments. Banks charge early repayment penalties for such an exemption.
Annual EMI Home Loan Increase: With their net income increasing annually, an employee can increase their EMI (annual) home loan by a small percentage to save interest. The percentage increase should be determined based on the increase in the person’s net income.
Additional EMI Payment: In addition to an increase, some employees receive an annual bonus that can be used to pay an additional EMI payment not only to save on interest but also to pay off the mortgage faster.
Transition to MCLR: Home loans obtained after April 2016 follow the Marginal Cost of Funds Home Loan Rate (MCLR), which allows the borrower to benefit from the rate change. Home loans obtained before April 2016 can be converted to MCLR subject to taxes and fees. The conversion fee is a percentage of the outstanding loan amount that has not yet been repaid. Therefore, it is advisable to do a cost analysis to see if the change from your mortgage to MCLR is beneficial.