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Ways to reduce your home loan burden

Monday, December 03, 2018

Anil Rego, Founder and CEO, Right Horizons

Owning your own home is a cherished dream for crores in India. But once you take a home loan, this feeling of joy can be at times replaced with worry especially if you pay a big EMI. Then, the home becomes a liability and the loan becomes a burden. This is why it is advisable to be prepared to use some tricks so that you can breathe a sigh of relief even if you have a home loan to repay. The rate of interest and EMI are connected and play a key role during home loan repayment. Here are some smart ways to cut your home loan burden.
1. Start prepaying early
Once you have taken a home loan, the interest is charged on the outstanding amount. As you know, the EMI you pay in initial years has a lot of interest portion and less of principal repayment. So, prepayment of the principal is an effective way to lower home loan burden. You can save a lot of interest if prepayment is started from the first year of a home loan itself. Do remember prepaying at later stages does not save that much interest on your home loan. Try to pay two extra EMIs from the first year and use the bonus/variable pay to prepay principal by good chunks annually. This will reduce your principal loan amount by a lot if you can do this regularly for first 4-5 years, and thereby reduce your interest outgo and repayment total.
2. Stretch EMI to your affordability
A typical home loan customer always wants to pay a low EMI. By increasing the tenure, the bank or home finance company will tell you that your EMI has been reduced. As long as the low EMI number satisfied the borrower, he/she is happy. Such happiness can be dangerous. In reality, you should pay as much EMI as you can afford. Don't be obsessed with any number. For instance, a Rs 50 lakh loan can have a monthly EMI of Rs 44345 if the interest rate is 8.8% and loan tenure is 20 years. In this case, you pay total interest of Rs 56.42 lakh. If you want to lower your EMI, the home loan provider can offer you Rs 41277 EMI option, but tenure will be 25 years. Do you know what is the interest you would pay? It is nearly Rs 74 lakh or 18 lakhs more than the previous offer. If you had taken an EMI of Rs 50,000 that was close to your affordability, the loan tenure would fall to 15 years and your total interest payment would be Rs 40 lakh only. Stepping up EMI helps to reduce loan tenure since higher EMI results in much faster loan repayment.
3. Avoid late charges
Many people try to keep their EMI dates at the middle of the month or at the wee end. This strategy can lead to a situation sometimes when you may have spent the money on something important, and as a result, the EMI isn't paid on the due date. It is always smart to pay EMI near your salary date. In this way, you will always have cash in the account for the EMI payment, and you as a borrower can escape any additional charges that could rear their ugly head due to momentary non-payment of dues. Also, any sort of phone call or slapping if extra charge causes emotional stress. Missing EMIs can also affect your credit history and ultimately your credit-score. By advancing the EMI date to actually be near your salary day, you are actually doing a big favour to yourself. It is advisable to keep liquid funds equal to one EMI in your bank account. In case you change jobs, there will be no continuity problem at home loan repayment front even though your employer may change

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