Paying off a home loan can be a hefty burden for a borrower who opts for a loan amount beyond his/her repayment capacity. The repayment of home loans is a lengthy process as this continues for 10 or more years. On top of that, the interest rate may keep changing along with the lender’s policies and terms.
Therefore, borrowers seek various opportunities to save some money on their home loan payments. This article presents some effective strategies to save money on home loan repayments.
Ways to save money on home loan repayments
One can follow these tips to reduce their monthly home loan instalments:
- Conduct thorough research
Before availing a home loan, it is always recommended to conduct thorough research and check several aspects like interest rates, processing fees and other terms. In case there is any confusion regarding any terms associated with a home loan, one must check the financial institution’s official website.
One may come across several prominent lenders offering similar kinds of interest rates. In such a scenario, applicants should compare processing fees, terms and conditions and other associated charges.
- Make certain prepayments
This is a facility which allows borrowers to reduce their debt burden by making several EMI payments in advance. Making such prepayments can help to reduce the amount of EMI or a reduced tenure or both. One can consider using a home loan prepayment calculator to avoid any sort of confusion regarding the benefits of a prepayment.
This online tool shows the amount of savings made through prepayments, new interest amount, existing EMI tenure, new tenure, etc. Another important thing to be aware of is the prepayment charge levied by a financial institution. Opting for a lender that charges zero or nominal prepayment penalty is advisable to make home loan payments more affordable.
- Make larger down payments
It is often recommended to make a larger down payment to get more favourable terms. It allows one to get longer tenures, higher savings on interest payments and lower processing fees. When the interest rate offered by a lender is comparatively lower, it leads to lower EMIs. It also increases a borrower’s home loan eligibility.
However, making larger down payments is difficult for many borrowers. One should consider making a financial plan and wait to save up the required amount.
- Balance transfer
Balance transfer is one of the most popular ways of reducing housing loan interest rates. In case a borrower is not satisfied with the interest rates and services provided by the existing lender, he or she can choose to transfer the outstanding amount to a new lender.
Borrowers can make a huge amount of savings by opting for a home loan balance transfer. Even a small difference in interest rates can result in considerable savings due to the high value and long tenure of most home loans.
If a borrower has already paid a major chunk of the loan, opting for a balance transfer is not recommended. This is because EMIs tend to have a higher interest component for the first half of a loan’s tenure. Moreover, the transfer charges paid to one’s old and new lenders can lead to overall losses.
- Set the tenure as per convenience
It is always recommended to select a shorter tenure with a higher amount of EMIs as it will help to get rid of the debt burden at the earliest. But one will end up spending a huge amount in interest payments for longer tenures. To ease out EMI calculations, one can consider using a home loan calculator for better financial planning.
On the other hand, choosing a short tenure could increase the EMI substantially, which would put a financial strain on the borrower. It is a good idea to avoid taking a loan amount one cannot afford.
- Compare lenders for better rates
Compare as many lenders as possible and look out for a better rate of interest. Take ample time to figure out the best interest rate as it determines the cost of one’s loan. Most prominent lenders offer similar kinds of interest rates. In such cases consider other factors like processing fees, top-up facilities, flexible EMI, flexible tenure options and more.
Many lenders provide pre-approved offers that allow their existing customers to easily avail credit. This facility is available for products like home loans and loans against property. One can check their eligibility for such offers by entering a few basic details on the lender’s official website.
- Negotiate for a lower rate
It has been observed that lenders offer discounted rates to creditworthy customers if they can negotiate well. For this, one should make a request to their relationship manager or a senior executive. They will get approval from their higher authorities and offer the best possible interest rates.
However, it is not a guarantee that the lender will offer lower interest on negotiating. There are several other factors like the borrower’s relationship with the lender, loyalty, credit score, etc., that affect housing loan interest rates.
- Make investments
One can invest their funds for the short or medium term instead of keeping those funds idle in a savings account. By making small investments regularly, one can accumulate a sizable chunk of wealth. This would help to save up sufficient funds to arrange for a large downpayment, which would help to get favourable loan terms.
- Avail tax deduction
An individual can avail tax deductions under section 24 (B) of the Income Tax Act to reduce the overall tax liability. The loan should solely use for the purchase of a house or the construction of the same.
The construction should be completed within a time frame of five years from the end of the financial year in which the loan was approved and disbursed. The deduction can be claimed only on the amount of interest paid on the EMI up to a maximum of Rs.2 lakh.
In addition, one can avail tax deductions for paying the principal amount for home loan repayments. This allows one to claim a maximum deduction of Rs.1.5 lakh under Section 80C in a financial year.
Home loan payments are indeed expensive but the strategies discussed above can help in saving a hefty amount of the cost of a loan. It is the financial commitment of an individual that plays a vital role in paying off a home loan. Paying it off either in full or in part can also help one to save more.
