Here’s how you save interest on your home loan EMI

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If you’re planning to invest in a house, there are certain things you have to consider. For starters, the prices of Indian houses are expected to increase this year, according to a Reuter’s poll. In fact, owning a home still remains a dream for millions of Indians because of the incredibly high prices.

This is why most consumers resort to choosing home loans. However, they are an equally expensive affair. When a loan is sanctioned, you are not just repaying the money you have borrowed. You have to factor in the interest and the inflation during your tenure.

So, how do you save a few lakhs on a home loan?

Let’s take an example.
Mrs. Iyer wants to purchase an apartment and is seeking a loan of Rs.60 lakh. The home loan she’s considering offers an 8.5% p.a. the rate of interest for a 10-year tenure with a processing fee of 1%. Let’s also assume Mrs. Iyer earns a monthly income of Rs.1 lakh.

One way of clearing your home loan quicker is by choosing a shorter tenure. This way, you not only save on interest but you also don’t have to bear the financial burden for an extended period.

If Mrs. Iyer decides to take a home loan for 10 years, this is how much it’ll amount up to:

Loan amount: Rs.60 lakh
Tenure: 10 years
Interest rate: 8.5% p.a.
Processing fee: Rs.60,000
Total interest payable: Rs.29,26,970
Total amount payable: Rs.89,86,970
Monthly EMI: Rs.74,391

As you can see, she will have to pay Rs.74,391 just as EMI for the next 10 years. Now, this can cause financial strain as her take-home salary each month is only Rs.1 lakh. If close to 75% of her income is directed towards her home loan EMI, Mrs. Iyer will be on an extremely strict budget. In case of emergencies, she will be forced to dip into her savings.

As you can see from this example, a shorter tenure isn’t always the best tactic to save on your home loan. It’s crucial to consider your debt-to-income ratio. It’s advised to maintain a debt-to-income ratio that’s below 60%. Also, banks and financial institutions will usually not approve a home loan if the EMI exceeds 50% of your income.

If your income is much higher, it’s feasible to choose a shorter tenure to clear your home loan. But that’s a luxury not everyone can afford.

Let’s also take a look at other tenures and see how much interest you’ll be paying. For the illustrations below, we have changed the tenures but kept other details of the loan constant.

Home loan with a 15-year tenure
Loan amount: Rs.60 lakh
Tenure: 15 years
Interest rate: 8.5%
Processing fee: Rs.60,000
Total interest payable: Rs.46,35,187
Total amount payable: Rs.1,06,95,187
Monthly EMI: Rs.59,084

Home loan with a 20-year tenure
Loan amount: Rs.60 lakh
Tenure: 20 years
Interest rate: 8.5%
Processing fee: Rs.60,000
Total interest payable: Rs.64,96,655
Total amount payable: Rs.1,25,56,655
Monthly EMI: Rs.52,069

Home loan with a 30-year tenure
Loan amount: Rs.60 lakh
Tenure: 20 years
Interest rate: 8.5%
Processing fee: Rs.60,000
Total interest payable: Rs.1,06,08,531
Total amount payable: Rs.1,66,68,531
Monthly EMI: Rs.46,135

*Do note the calculations mentioned above do not factor in inflation.

As you can see, the interest payable keeps increasing as your tenure gets longer. The plus side is your EMI will be much lower. However, you’re paying up to almost thrice your property value just in interest, which is a downside.

So, what’s the best way of reducing the interest amount on your home loan? Here are a few suggestions:

  1. Higher down payment: One of the easiest ways of bringing down the interest amount and your EMI at the same time is by making a higher down payment. This will not only reduce your principal amount but also the interest and the EMIs.
  2. Prepayment: You can also consider prepaying the loan amount before the tenure ends. You can choose between part prepayment and complete prepayment. If you have a floating-rate package, there will be no prepayment penalty on early closure of your loan. For fixed-rate packages, if you prepay the loan with your own funds, you don’t have to pay a penalty. However, if you choose to refinance or use funds that are not your own, you will be charged a prepayment fee.
  3. Increase EMI amount: Hike up your EMI amount by 5% to 10%, especially if there’s been a salary increment or you’ve received your bonus.

You can also research on Home loans that offer lower interest rates and consider refinancing your home loan. However, remember you will have to set aside a certain amount for all the processing fees, legal fees, etc.

There are several ways of saving lakhs on your home loan. Some methods are aggressive whereas some are practical. It’s best to choose a way that’s not only reducing your financial burden but also not heavily impacting your other financial commitments.

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