It is likely that one of your biggest expenses would be the equated monthly installment (EMI) of the loan you have availed of to buy your home. Often, it accounts for 30% to 40% of the total expenditure. As a result, you may be unable to meet your other financial objectives through investing.
Longer tenure means higher interest paid
When you hold certain types of investments for a long period, you are able to earn higher returns. This is because of the compounding effect where your returns are able to earn profits.
You may choose for a longer home loan tenure to reduce your monthly outflow. However, longer tenure means you pay more interest over the years whereby you reduce the benefits of compounding. Shorter loan tenure allows you to repay the principal faster, thereby reducing your interest outflow.
You may reduce the burden of interest on housing finance through the following.
1. Refinancing the loan
Consider refinancing your housing loan with another lender that offers a lower rate of interest. This will lower the EMI, which will help you save a significant amount in the long run. You can even use a refinance mortgage calculator to check what your new monthly payment, interest rate, and potential savings would be like. However, before you decide to refinance your loan, consider factors like the fees, prepayment penalty, and legal charges that may be levied by your existing lender. These additional charges may reduce your overall interest cost.
2. Repayingthe principal quickly
The interest is applicable on the outstanding principal amount of your housing loan. When you repay the principal quickly, the interest cost reduces. This will help you reduce your burden on your loan. Here are three ways to repay faster.
- Increase the EMI each year
If you are a salaried individual, you may receive an annual increment. This allows you to increase the EMI each year. Depending on the annual increase in your income, you may consider enhancing the EMI to repay the loan quicker.
- Pay an additional EMI annually
If you receive an annual bonus, consider using it to pay an additional EMI. This will reduce the actual loan tenure and help you save a significant amount in the longer duration.
- Use both of the above
You may be able to save a huge amount on the interest payout while repaying the loan faster if you combine both of the aforementioned options. Consider using the annual bonus to pay an additional EMI. On the other hand, you may increase the EMI based on your annual income increment.
3. Opting for MCLR
As per the Reserve Bank of India (RBI) guidelines, if you have availed of a loan after 1st April 2016, you may choose the Marginal Cost of Funds Lending Rate (MCLR). This will allow you to change the interest rate quickly and more easily. Therefore, if theinterest under MCLR system changes; your EMI will reduce. However, you must use a home loan calculator to understand the benefits because lenders may levy a conversion fee that may reduce the actual savings.
Buying a home without a loan when real estate prices are constantly rising is almost impossible. However, it is a necessity and you must check your home loan eligibility and other factors before making a choice. Furthermore, you must be smart and use the aforementioned ways to reduce the loan repayment burden.