For Most people, purchasing a home is a major milestone. However, the associated mortgage debt can be a long-term financial commitment for many. In recent years, home loan borrowers have experienced a substantial increase in their monthly payment amounts. This can be attributed to the repeated hikes in interest rates on home loans by banks, which began in May 2022.
Though the Reserve Bank of India (RBI) has kept the repo rate steady at 6.5%, here’s a closer look at its impact. Let’s consider borrowers with a Rs 40-lakh home loan for a period of 20 years, for instance. Assuming the interest rate increases from 7% to 9.25%, these borrowers will have to bear an additional interest burden of Rs 15.05 lakh.
While it may seem difficult to mitigate this surge in interest rates, you can significantly reduce your overall interest expenditure by implementing strategies that can assist in paying off your home loan faster. The following are a few strategies to consider while making informed decisions to accelerate the payment of home loans:
1. Pre-payment: Pre-payment involves making additional payments towards your mortgage principal, which can significantly reduce the overall interest you pay over the loan term. Increasing your monthly payments or making lump sum payments can expedite paying off your debt.
2. Partial Payment: Similar to pre-payment, partial payments involve making extra payments towards your mortgage. However, rather than committing to a regular schedule, you can make additional payments as and when you can. Even small increments made consistently can substantially impact reducing your debt over time.
3. Higher Interest Outgo: Opting for a shorter loan term or refinancing a loan with a higher interest rate can lead to increased monthly payments but also result in paying off the debt faster. While this strategy may seem counterintuitive, it can save you significant interest in the long run. However, it’s crucial to carefully assess your financial situation to ensure you can comfortably manage the higher payments.
Moreover, an EMI incorporates both interest and principal repayments. With a higher outstanding principal, the interest component in the EMI increases. However, by reducing the outstanding principal, the interest portion decreases, allowing for a higher proportion of the EMI to be allocated towards principal repayment.
Let’s look at this example. Suppose you have a home loan of Rs 40 lakh for 20 years at an interest rate of 9.5%, resulting in an EMI of Rs 37,285. If you make one extra EMI payment at the beginning of each year, you could save approximately Rs 11.73 lakh. Your total interest paid would be Rs 37.75 lakh instead of Rs 49.48 lakh. Additionally, you would be able to fully repay your home loan in 16 years and one month, as opposed to the original 20-year term.
Should you choose to increase your EMI by 10%, elevating it from Rs 37,285 to Rs 41,014, you stand to save approximately Rs 16.89 lakh in interest payments. Consequently, your loan tenure would be reduced to 14 years and one month, down from the initial 20 years.
Likewise, making an annual partial prepayment of Rs 50,000 can lead to savings of Rs 14.47 lakh in interest payments, enabling you to clear the loan in 15 years instead of the original 20-year term.
Paying off your home loan debt faster can provide financial security and save you lakhs of rupees in payments.
(By Atul Monga, Co-Founder & CEO, BASIC Home Loan. Views are personal)
