- Do you know paying off a home loan quickly has massive savings in store for you?
- But how can you do so given that it is a big-ticket loan? Read the payment strategy highlighted in this post and act accordingly
Buying a dream home is quite an accomplishment given the high price tag that it comes with and the savings you need to make it happen. But when it hurts your future prospects, you start worrying. Yes, home loan payments can be massive as they run for as long as 20-30 years. With such a long payment tenure, it can be difficult for you to save enough to live your post-retirement days comfortably. But if you remain calm and make an informed decision regarding a home loan, you can put yourself on the right track. One of the informed decisions is to pay off the home loan faster. This will only help you think about your future. But how will you ensure a faster payment without affecting your budget? It’s a tough challenge given the inflation and the kind of lifestyle we are following. However, there are ways by which you can do so. Read this post to know the ways and choose the one that you feel is the best for you.
Look to Buy a Property That Comes to Your Budget
For a faster payment of a home loan, you need to first ensure the property you are looking for is well within your budget. The scope of the word ‘Budget’ is very wide here. You may like to buy a property wherein the home loan EMI won’t constitute more than 40% of your net monthly income (NMI). But if you search for a property that comes with a lesser price, you can take it for a shorter tenure. This might take the EMI to be around 50% of your NMI. The lender won’t say ‘No’ to this sort of loan arrangement. With a shorter tenure, you give yourself the best chance to pay off the loan quickly. Yes, with EMI occupying half of your take-home income, you need to be particular of the expenses you make. Assuming you have no other debt, lenders can allow EMI upto 50%-60% of the monthly income. However, that criteria can change depending on the income slab of an individual and the quantum of loan he/she will service.
Rearrange the Home Loan During its Course
In case you have chosen a greater tenure under the impression of a lower EMI, you could be in for a rude shock if you allow the loan to go this way till maturity. The overall outgo including the interest payment can be more than double the amount you have borrowed. So, after servicing the loan EMIs for a while, you can make a part payment. The best part is that you won’t need to pay any fee for the same, provided it is a floating rate loan. The fact that home loans are offered predominantly on a floating basis, chances of you grabbing a floating rate home loan are greater. The part payment will help reduce the outstanding loan balance. So, to pay off the reduced balance post part payment faster, you can ask the lender to curtail the tenure from the original schedule. This won’t hurt your budget too. Let’s consider an example to understand the same.
Example – You are currently servicing a 20-year home loan of INR 60 lakh availed around 3 years ago at an interest rate of 8.80% per annum. With this loan structure in place, the EMI must have been INR 53,214, which was slightly more than 50% of your take-home income i.e. INR 1 lakh at the time of applying.
If you continue to pay at this pace, you’ll end up paying a total interest of INR 67,71,412. So, if you make a part payment of INR 5 lakh after 5 years from here on, the outstanding balance will come down to INR 42,22,611 (47,22,611-5,00,000). By that time, the loan must have completed 8 years of its loan journey. You will most likely have paid interest worth INR 38,31,176.
Now, there are two options for you. You can either continue for the remaining 12 years and pay a reduced EMI or get the tenure curtailed by keeping the EMI constant. The table below shows the benefits of having a curtailed tenure over a longer tenure.
|Loan Rearrangement Options||Loan Balance Post Part Payment||EMI Post Part Payment||Interest Outgo Post Part Payment||Total Interest Outgo Including the Interest Paid Before Part Payment||Savings on Interest Payment Due to Part Payment|
|Loan Carried on for 12 Years||INR 42,22,611||INR 47,580||INR 26,28,941||INR 64,60,117||INR 3,11,295 (67,71,412-64,60,117)|
|Loan Tenure Curtailed to 10 Years||INR 42,22,611||INR 53,214||INR 21,41,502||INR 59,72,678||INR 7,98,734 (67,71,412-59,72,678)|
The Question Remains – How Will You Generate Savings of INR 5 Lakh for Part Payment?
Sticking to the above example wherein you are assumed to have been paying the loan for 3 years and you have to arrange a part payment sum of INR 5 lakh in 5 years from now. So, every year, you will need to generate savings of INR 1 lakh. Month-wise, you need to save around INR 8,333. So, save as much as you can from your daily routine. If you manage to save more than the amount shown, you can have more for part payment. That will further reduce the burden.
Go for a Reduced Tenure While Transferring Your Outstanding Home Loan Balance to a New Lender
The long tenure of a home loan gives us multiple opportunities to go for a balance transfer. So, if you come across a lender charging interest at a rate lower than the existing lender by at least 0.25%-0.50%, go for a balance transfer. This will fetch you considerable savings if the remaining tenure is substantial. Let’s understand mathematics better considering an example below.
Example – You are servicing a 20-year home loan of INR 60 lakh at 8.80% for 3 years. The EMI on this comes out as INR 53,214. The outstanding loan balance has come down to INR 56,21,956 after 3 years of loan payment. You have paid interest worth INR 15,37,667 as of now. If you go like this, you will end up paying a total interest of INR 67,71,412. You have come across a lender that is offering you the balance transfer facility at 8.00% per annum. Technically, 17 years are left for the loan to be over. But, if you get it curtailed to 14 years, how will it matter to you? Don’t fret, just check the table to see the likely repayment scenario for you.
|Repayment Aspects||Savings on a Balance Transfer of 56,21,956 @8% for the Remaining 17 Years (In INR)||Savings on a Balance Transfer 56,21,956 @8% for a Reduced Tenure of 14 Years (In INR)|
|EMI Payable at 8%||50,500||55,731|
|Interest Payable at 8%||46,79,963||37,40,931|
|Interest Paid Till Now||15,37,667||15,37,667|
|Interest Paid Till Now at 8.80% + Interest Payable at 8%||62,17,630||52,78,598|
|Savings||5,53,782 (67,71,412-62,17,630)||14,92,814 (67,71,412-52,78,598)|
Assuming the income must have risen after 3 years of paying the loan to the existing lender. The increased EMI of INR 55,731 on a shorter tenure of 14 years can thus be accepted by the new lender. This will allow you to save more. You will need to pay a balance transfer fee to the new lender.
Disclaimer – Calculations made are purely indicative and are for illustrative purposes only.