- You may not enjoy paying large home loan EMIs when you get older
- Read here the tips to get rid of the loan obligations quickly and easily
Home loans can be quite difficult to service when you become 45-50 years old and don’t achieve the desired professional growth by that time. The likely situation of limited jobs at that stage of life can make you feel cramped while paying the home loan EMIs. Ideally, one should look to pay off the loan before they reach such a stage in their life. But the question remains, how can you do that successfully given the challenges the day-to-day life presents to you? Yes, it’s not going to be that easy as many would think of. But if you are alive to the situation, you can make it happen. Let’s read this post, check out the actions suggested and implement them in real-time.
Don’t Go for a Very Long Tenure to Pay Off Your Home Loan
Home loans can be given for a maximum of 30 years; most choose a tenure of 20-25 years. The reason why most choose a very long tenure is that it curtails the EMI amount to an extent. But if you can afford a slightly higher EMI, you can choose a comparatively shorter tenure and pay off the loan much before. Yes, your lender will see the increased EMI and your present income to assess your eligibility for the said loan arrangement. In case the increased EMI along with other loan obligations, if you have, come to around 50-60% of your net monthly income, the lender can approve such a deal. Let’s consider an example to understand the benefits of choosing a shorter home loan tenure.
Example – Your monthly income is INR 1 lakh and you wish to apply for a home loan of INR 50 lakh. The lender provides you the same loan amount at an interest rate of 7.50% per annum. Now you are wondering whether you should take the loan for 20 years or go for a shorter tenure of 15 years. Let’s get a clue from the below table.
|Loan Particulars||Repayment Estimates When Going for a Tenure of 20 Years||Repayment Estimates When Going for a Tenure of 15 Years|
|Loan Amount||INR 50,00,000||INR 50,00,000|
|EMI Payable @7.50%||INR 40,280||INR 46,351|
|Interest Payable @7.50%||INR 46,67,118||INR 33,43,111|
Yes, the EMI on a 15-year home loan is INR 6,071 (46,351-40,280) more compared to when you take the loan for 20 years. Even if you have any more obligation but all of that remains within 50%-60% of your monthly income i.e. 1 lakh, the lender won’t hesitate in approving a 15-year home loan, saving you interest payments worth INR 13,24,007 (46,67,118-33,43,111).
Prepayment is Another Option You Can Avail of
You can also prepay the loan to get rid of the home loan obligation faster. Lenders allow both part and full prepayment on a home loan. To ensure a successful prepayment, you must have enough savings. This is where you need to be meticulous of your finances right from the time when you begin to pay the home loan EMIs. So, where can you put your hard-earned money to accumulate enough for a prepayment? Well, you should distribute your savings across different financial instruments. Put some in savings bank accounts, earmark some towards fixed deposits, keep some in recurring deposits and even mutual funds.
How Should You Distribute the Savings Across Different Financial Instruments?
Save from your daily routine and invest across different financial instruments according to your risk appetite. Given that you are saving the sum predominantly for a home loan prepayment, you should invest the bulk in fixed income instruments such as bank deposits. You should also consider the home loan EMI calculator before planning to prepay the loan. Check the estimated outstanding loan by the time you look to prepay. If you can’t do a full prepayment, you can do a partial prepayment and get rid of the loan early. You can get the tenure curtailed by keeping the same EMI after making part payment. Let’s check out the example below to understand it better.
Example – You avail a home loan of 45 lakh at 7.30% per annum for 20 years. If you make a part payment of INR 5 lakh after 8 years, how will the repayment pan out should you go for the same EMI after this transaction? Let’s find out!
|Home Loan Aspects||Repayment Estimates When Paying the Same EMI After Part Payment||Repayment Estimates When Paying a Reduced EMI After Part Payment|
|EMI Payable @7.30%||INR 35,703||INR 35,703|
|Interest Outgo @7.30% Over 20 Years||INR 40,68,809||INR 40,68,809|
|Interest Paid @7.30% for 8 Years||INR 23,45,938||INR 23,45,938|
|Part Payment Amount After 8 Years||INR 5,00,000||INR 5,00,000|
|Outstanding Balance After 8 Years||INR 34,18,415||INR 34,18,415|
|Outstanding Balance After Part Payment of INR 5,00,000||INR 29,18,415||INR 29,18,415|
|EMI Payable @7.30% After Part Payment||INR 35,703||INR 30,481|
|Interest Payable @7.30% After Part Payment||INR 11,25,639||INR 14,70,872|
|Interest Paid @7.30% for 8 Years + Interest Paid After Part Payment||INR 34,71,577||INR 38,16,810|
|Savings||INR 5,97,232 (40,68,809-34,71,577)||INR 2,51,999 (40,68,809-38,16,810)|
So you can see by keeping the same EMI of INR 35,703 after part payment, you can save INR 5,97,232 as opposed to INR 2,51,999 when paying a lower EMI. The loan will wrap up in 17 years and 5 months overall when choosing the same EMI after part payment. Post part payment, the loan will run for 9 years and 5 months.
If you are looking to prepay the entire loan in say 15 years, you will need to accumulate around INR 17,90,266 by that time. This will be the outstanding loan balance after 15 years which you can check using the home loan EMI calculator. So, even if you invest 4,000-5,000 in an equity mutual fund SIP, you will accumulate a bit more than the required amount by that time, assuming the annual return remains 12%. Since returns can fluctuate in an equity mutual fund, you will be advised to invest the bulk in fixed income instruments if you are planning a home loan prepayment.
Put 50%-65% of your savings in bank accounts, fixed deposits and recurring deposits, and invest the rest in equity instruments. You could so easily accumulate beyond the required prepayment amount. The amount left after prepayment can be used to meet your other needs.
How to Contact the Lender for a Part Payment?
You should visit the nearest branch of the lender with the required documents to make the part payment. Go with the prepayment amount cheque, along with the latest home loan statement showing the principal and interest paid so far, as well as the outstanding loan balance. The lender will go through the statement carefully and process the cheque. When it gets honoured, you will get the intimation of prepayment on your registered mobile number or email address. If it is a part payment, a new loan arrangement letter will be issued to you. In case it is about a full prepayment, your home loan will get closed there itself. You can ask the lender to return you all the original property documents and a No-objection Certificate (NOC) stating that there are no dues left.