3 Ways to Prepay Your Home Loan

When it comes to buying your dream house, most of us will depend on a Home Loan to bear the costs. For what it’s worth, a Home Loan offers many benefits, the most significant of them being the ability to buy a tangible asset which will hopefully gain appreciation over time. Yet another crucial advantage of a Home Loan is the tax rebate which you can enjoy under the Section 80C of the Income Tax Act towards the payment of the principal amount and under the Section 24 of the same act, towards the sum of the interest on the loan.

That being said, a massive Home Loan has its own limitations as well. For instance, most Home Loan tenures extend from 10 years up to 30 years, thus implying a long riding financial commitment, which can seem like a burden in the later years as the household expenses witness a rise, and other financial obligations start to take precedence. It is for this reason that a vast majority of homeowners try to pay off their loans as soon as possible. Not only does this step helps them enjoy a debt-free life, but also gives them the opportunity to meet other financial needs.

If you too are looking forward to paying off your Home Loan before the completion of its tenure, here are some tips which can help you achieve this goal, sooner rather than later.  

1. Choose an Apt Tenure

They say, prevention is better than cure. Since a Home Loan is already a long-term credit, you must make sure that your tenure is not any longer than it should be. When procuring the loan, it might seem an excellent alternative for you to opt for a lower equated monthly instalment (EMI) thereby managing your expenses comfortably. However, you should understand that a lower EMI would imply a longer tenure, which in turn would lead you to pay a higher interest thus proving to be a significantly costlier deal in the long run.

Hence, it is advisable that before finalising the terms of the loan, you take into account your Home Loan Eligibility, your current and future income as well as expense, along with your age. You should also give due diligence to significant life events such as the graduation of your children, their marriages, the retirement of your parents, and so on, which will bring along additional financial responsibilities. Simply put, the shorter your tenure, the better off you will be in the long run. In this case, you may not even need to prepay the loan, as it will automatically get paid off in a comparatively shorter tenure.

2. Increase Your EMI Amount

If you cannot opt for a shorter tenure, as mentioned in the previous point, you should try increasing your EMI amount every time you get a salary hike or start churning greater profits from your business or practice. This simple practice will help reduce your tenure significantly, thus bringing down the overall cost of your tenure. Moreover, you wouldn’t need to save hefty sums of money to make part payments towards the loan. Besides, you will also save yourself from the unsolicited prepayment penalty. For all you know, a simple increase of up to 10% in your EMI every year can quickly reduce your tenure into half of what it was supposed to be!

3. Prepay Whenever You Can

When it comes to paying off a loan at the earliest possible, nothing comes handier than prepayments. The concept is simple. As and when you have excess funds on your hand, make a part payment towards your loan. This can be done when you receive a festive bonus at your job or make a substantial profit in your business. Not only will this part payment reduce the outstanding principal amount, but will also help you save on the interest outgo over the tenure of the loan. Needless to mention, this simple measure will also help in reducing the overall tenure, that is if you keep paying the same EMI or a higher one.

That being said, you should only contemplate this alternative if you have a floating rate Home Loan, as RBI guidelines will allow you to make the prepayment without any penalties. If however, you have a fixed interest loan and want to pay off the mortgage in part or full, then you may have to check with your bank for the penalty, which may range from 0.5% to about 2.5% of the outstanding loan amount. In this case, you must check whether or not is it worth paying the fee.

While prepayment of loan is a great alternative, it is not recommended to use your all your savings to do the same. You should, in fact, have at least six months’ worth your income stashed away in an emergency fund. Only when this fund is secure, should you move ahead to make other such payments.

Then again, when you have the alternative of putting the surplus funds towards an investment which can offer higher returns when compared to the amount you save by prepaying, you should go ahead with the investment option.

We hope that you are now aware of some of the simple ways to reduce your tenure, and in the process, save on the overall interest outgo towards your loan. If you still need any assistance in this regard, feel free to get in touch with your bank, or your financial advisor, and take the best possible route towards economic freedom!

Also Read: The Do’s and Don’ts of Home Loan Prepayment

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