A house is an added count in your assets and at the same time gives you a feeling of security and satisfaction. Borrowing a home loan to buy a house for residential purpose is always an enlightened decision as it ends the terrible cycle of paying heavy rent in lieu of giving you a place you can call your own. Still it is extremely important to explore in the market and choose the right type of available home loans with a suitable tenure, competitive interest rate and the best deal that fits in your budget. You not only have to calculate the EMI’s but also plan all your expenses beforehand in order to pay the EMIs on time. In fact, just paying the EMIs on time is not enough but you should think of pre-paying your home loan partially or in full to come out of your financial commitment earlier than expected.
Pre-closure of a home loan helps the borrower to save you a big amount. Let us understand this with an example.
Suppose X take a home loan at 9.5% for 20 years to purchase a house worth Rs 75 Lakhs; the loan amount is Rs 60 Lakhs. In this case, the total interest paid by you will amount close to Rs 75 lakhs. But if the same loan is taken for only 10 years, the total interest will be approximately Rs 33 lakhs. As we can observe that there is a huge difference between the two interest amounts (Rs 42 lakhs!). Though, the tenor was reduced only by 10 years. But if you have already borrowed the loan for a longer tenor, you can opt to pre-pay it by making the partial payment or in the complete amount. The sooner the home loan is closed, the lesser interest you will have to pay.
Following are the few smart ways that can help to reduce the overall home loan burden-
Banks/ NBFC’s as well as the builders offer the pre-EMI plans with particular projects. Under this plan, the borrower has to pay only the interest component as long as the project is under-construction. Once the borrower takes the possession and shift to the new home after the completion, the payment of regular EMIs i.e., interest + principal will start. The borrower should opt for the pre-EMI plan only if he/ she have fund-flow issues because in opting for Pre-EMI the actual loan (principal amount) does not even get reduced by a penny. Paying the regular EMIs from its initial days will reduce the principal amount which is beneficial in the long run. This will also control the unnecessary expenses during the initial stages.
It is always advised by the financial experts to maintain the debt-to-income ratio in case the disposable income increases. This means if the income increases, the borrower should also increase the EMI in the same proportion in order to repay the debt early. This will also help to control the extra expenses when the salary increases. Any decrease in EMI affects the interest component while keeping the principal amount unchanged. Therefore, if the interest rates are reducing, opt to reduce the tenure instead of the EMIs as it will also reduce the principal component.
In order to prepay your home loan, the borrower should channelize the sudden gains and make one-time payments towards the loan prepayment. One-time payments may include your yearly bonuses, any amount received as a gift or an incentives, etc. Windfall gains may come in the form of winning a lottery, unforeseen profits, etc. These funds may help you make partial bulk payments that remarkably reduce the debt.
Adopt a habit of doing regular monthly savings to make some bulk pre-payment of your home loan. For example, if the borrower plans to pay Rs 60,000 next year as a bulk amount towards the loan prepayment then starts saving Rs 5,000 every month. Recurring deposit prove to be a great option for such savings. This calculated and crucial payment plan will help to mobilize the monthly savings towards an annual prepayment which reduces the tenure as well as the EMI payments.
In the current financial market a number of innovative financial services are available that can help you to prepay the home loan amount. One such available scheme is home loan overdraft. If the borrower feels that any surplus income is left after making monthly EMI payments, home loan overdraft facility can be opted where the borrower can deposit the surplus amount in the loan account with an extra liberty of withdrawing it whenever required.
The conclusion is- if one can afford to make early payments towards the home loan and close it before the said tenure than you must. For any individual the first priority is to reduce his/her liabilities. Home loan is the biggest financial commitment and should be paid off as early as possible. However, the borrower should also consider the prepayment charges and weigh the choices accordingly.