A home loan is a long haul obligation, considering the fact that its repayment might stretch up to 30 years. This loan helps you own a house along with availing tax benefits; however, it also impacts your present and future finances. Therefore, you should pay off the loan as soon as possible by carefully managing related factors like repayment tenure and monthly instalments. If you plan to foreclose your existing home loan, here are a few tips that can help you manage it smartly.
1. Choose home loan tenure as short as possible
Tenure is an important factor to be considered when you plan to close your home loan early. You can opt for loan tenure as short as possible so that you can quickly repay your loan. However, this would also mean shelling out higher repayment amount because tenure directly impacts your home loan EMIs (Equated Monthly Instalments). Shorter the tenure, higher the EMI, and vice versa.
Therefore, evaluate your financial condition well before choosing the loan tenure so that you can pay the EMIs without compromising on your crucial financial goals. Longer tenure means lower EMIs, which allows you to repay the loan more comfortably without stretching your finances too much. But longer tenure also leads to higher interest cost as you pay interest amount for a longer period.
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To arrive at an EMI that is feasible to pay, use the Home Loan EMI Calculator. This online tool calculates EMI instantly on the basis of details provided regarding interest rate, loan tenure and loan amount.
2. Increase your home loan EMI with time
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 are salaried or are in a profession where you expect your income to increase with time, try increasing your home loan EMI gradually. Prepayment of your home loan through higher EMI would decrease your outstanding loan amount.
3. Prepay your home loan whenever possible
Home loan prepayment from time to time is a quick way to reduce your loan liability, as it eventually decreases your loan tenure. This also helps customers save substantially on the total interest pay-out. Earlier, lenders used to charge nominal part-prepayment and foreclosure penalty for floating interest rate home loans. However, as per RBI guidelines, banks and HFCs/NBFCs are not allowed to levy prepayment penalty on prepayments of home loan and other retail loans. 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.
Check Also: Home Loan Prepayment Calculator
4. Opt for balance transfer for lower home loan interest rate
Another way to close your home loan early is Home Loan Balance Transfer (HLBT), wherein you move the outstanding loan amount to another lender offering lower interest rate. However, you should consider these points about the new lender before taking this step:
- Should offer lower home loan interest compared to the current home loan rate
- Cost of loan transfer should not be high in terms of loan processing fees and other charges
- Should provide top-up home loan, if the request for it was denied by the current lender
Transferring your balance home loan in the initial years of the loan tenure will help you save substantially on the interest pay-out. And while doing so, you should avoid extending your loan tenure. This is so because borrowers, usually, pay the majority of the interest component during the initial years of their loan, thus, a home loan balance transfer won’t lead to big saving, if you go for a higher tenure again. Keeping the new tenure same as the remaining tenure of the existing home loan will save you from extra interest payment.
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However, if you are under financial stress, you can consider extending the loan tenure, as it would reduce the EMI burden. And you always have the option of prepayment in case of availability of any disposable income from your work bonus, hike, some sort of business profit or investment. Thus, go for home loan balance transfer only when it helps in saving significantly or in reducing your financial burden.