By decreasing the amount allocated to interest, you can effectively reduce the overall burden on yourself.
Most banks and non-banking financial companies (NBFCs) provide the facility of prepayment.
Reserve Bank of India (RBI) has recently raised the repo rate by 2.5 percent, leading many banks to increase their Marginal Cost of Funds Based Lending Rate (MCLR). This increase directly affects home and auto loans. Customers, who were previously paying a 7 percent annual interest rate for a home loan a year ago, are now having to pay approximately 9.5 percent. People frequently acquire home loans to purchase their desired homes. However, due to the longer repayment period and interest associated with home loans, individuals desire to settle them quickly. To achieve this, there is an option known as loan closure or prepayment. Most banks and non-banking financial companies (NBFCs) provide the facility of prepayment. Nevertheless, since home loans are long-term loans and banks and financial institutions earn substantial income from them, many companies impose certain charges for prepayment. However, not everyone is obligated to pay these charges.
If you wish to repay your home loan at the earliest or reduce its burden, here is a smart approach to consider:
Make partial prepayments on your loan:
If your income has grown over the past few years and your savings are increasing, you have the option to make partial prepayments on your loan. This will lower the principal amount of your loan, resulting in a reduction of the interest liability as well. By decreasing the amount allocated to interest, you can effectively reduce the overall burden on yourself. Many banks levy a prepayment fee of approximately 2 percent, but not all borrowers are subject to this charge. Individuals, who have taken loans on a floating rate, are exempt from paying this fee. However, if the home loan has a fixed rate, there might be a charge associated with prepayment.
Consider choosing home loan options that provide increasing EMIs
Among the various loan types available, home loans generally have the longest repayment period. Most lenders offer home loans with terms that can extend up to 30 years. During this extended timeframe, it is expected that a borrower’s income will increase, particularly for salaried professionals. If you anticipate a gradual rise in your income over time, consider gradually increasing your home loan Equated Monthly Instalments (EMIs).
Certain home loans lenders like ICICI Bank and HDFC provide flexibility to their customers by allowing them to incrementally raise their home loan EMIs each year in proportion to their income growth. This approach aids in faster repayment of the home loan. Additionally, such a facility can enhance an applicant’s home loan eligibility, as lenders also take into account the prospective borrower’s future earning potential.
Take a loan for a short period
You can also opt for a shorter loan tenure to reduce your overall loan burden. If you choose a loan term of 25 or 30 years instead of 15 years, your EMIs will certainly be lower, but the interest paid over the entire loan period could potentially double. Opting for a shorter tenure loan means you will need to pay less interest overall.
