Lenders usually offer home loans for up to 30 years or till the retirement age of the borrower, whichever comes earlier. Owing to its long tenure, the overall interest cost in a home loan can easily surpass the principal amount. Due to this reason, a lot of borrowers wish to close their home loans before their loan maturity. If you too are planning to close your home loan as soon as possible, here are a few tips that can help you manage it smartly.
1. Opt for home loan balance transfer
Home Loan Balance Transfer (HLBT) allows you to move your outstanding loan amount to another lender at a lower interest rate. The lower interest rates would help in reducing your EMI and interest cost. Opting for the same EMI may allow you to close your home loan earlier than the tenure of the original loan.
When should you go for a home loan balance transfer?
Transferring your balance home loan in the initial years of the loan tenure will help you to derive higher savings in the interest cost. EMIs during the initial years consist mostly of the interest component. Consider opting for tenure extension only when you are aiming for lower EMI.
Balance transfer interest rates are usually the same as the regular home loan rates. However, there are a few lenders that offer different rates for home loan balance transfer cases. The following table will give you a fair idea of home loan balance transfer rates charged by some of the top banks and HFCs in India:
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2. Prepay your home loan whenever possible
When you prepay your home loan partially, you have an option to either reduce tenure or EMI. In such a scenario, opt for tenure reduction while keeping the EMI same as before. Decreasing your repayment period will result in higher savings on the total interest pay-out whereas decreasing your home loan EMI will reduce your EMI burden. Hence, borrowers who are comfortable paying their existing home loan EMIs should opt for tenure reduction.
As per RBI guidelines, banks and HFCs/NBFCs are not allowed to levy prepayment penalty on prepayments of home loan and other retail loans, lent on floating interest rates. Hence, borrowers must try to prepay their home loans whenever they have surplus funds. However, the prepayment must be made without compromising your contributions towards crucial financial goals as it might push you to avail costly loans in future. Therefore, prepay home loan only when you have adequate funds after considering emergency funds, investments and monthly contributions set aside to meet important financial goals and funds earmarked for other liquidity-related requirements.
Home loan applicants can also consider availing home loan overdraft option to benefit from making prepayments while maintaining their liquidity. Home loans with an overdraft facility allows borrowers to deposit their surplus funds into the linked overdraft account, which can either be a savings or current account. When calculating the interest component, the average balance maintained in the overdraft account is deducted from the outstanding principal in the loan account. So, any surplus parked in the overdraft account acts as a prepayment against the outstanding principal, thereby reducing the overall interest cost of the home loan. Similarly you can withdraw money from your overdraft account whenever the need arises. In case, your existing lender does not allow you to avail home loan overdraft facility, consider transferring your outstanding home loan balance to a new lender offering overdraft facility. Some of the lenders offering home loan overdraft include SBI, ICICI Bank, Bank of Baroda, Punjab National Bank and Axis Bank.
3. Opt for home loan variants offering increasing EMIs
Out of all the types of loans available in the market, home loan has one of the longest repayment tenure. Most lenders usually offer home loans for up to 30 years. During such a long period, a borrower’s income is expected to increase, especially in case of salaried professionals. If you expect your income to increase with time, try increasing your home loan EMI gradually. There are many home loan lenders such as ICICI Bank and HDFC that give flexibility to their customers to increase their home loan EMIs every year in proportion to the increase in their incomes; thus helping them repay their home loans faster. Such a facility also increases an applicant’s home loan eligibility as in such cases lenders also factors-in the future earning potential of the prospective borrower.
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