How Do Home Loan Repayments Work? - Home Loan Stories | Kotak Mahindra Bank 75 https://www.kotak.com/en/personal-banking/loans/home-loan/stories-in-focus/understand-the-repayment-mechanism-of-a-home-loan.html

05 MAY, 2021

Due to the significant and constant price rise in the real estate sector, home loans have become a popular financing option for property purchase. However, once you avail a home loan, it should be your prime responsibility to repay the loan amount within the specified tenure. Home loans are secured loans, wherein the property being purchased acts as collateral. Thus, in case of default, the lender reserves the right to seize your property to recover the losses incurred. This makes timely home loan repayment all the more important. Mentioned below are some crucial tips that can make home loan repayment much easier for you:

Keep a Track of Your Monthly Budget and EMIs

Do not overspend and keep a track of your monthly budget. Choose an EMI amount that suits your budget so that you can repay the home loan without compromising on lifestyle. Also, while availing the loan, you get the option of choosing a preferred EMI date. Pick a date that is close to your monthly salary date so that you have adequate funds to make EMI payments. Do not miss out on EMI payments as that may attract penalty charges and affect your credit score negatively.

Increase Your EMIs Gradually

As your income increases with time, consider increasing the EMI to repay the home loan faster. A major benefit of paying a higher EMI is that your loan tenure will reduce, and this will help you save on the overall interest payout.

Use Surplus Income for Prepayment of Home Loan

Prepayment of home loan will not only reduce your debt burden but also help you close the loan sooner. Therefore, consider using additional income such as annual bonuses, dividends, gifts, etc. to make part-prepayment of your home loan. At the time of taking the home loan, ensure to make a note of the prepayment clause and charges. This will avoid any inconvenience at later stages.  

Home loan interest rates are primarily of two types, i.e., fixed, and floating. Fixed rate remains constant throughout the loan tenure, whereas floating interest rate may fluctuate depending upon the market rates. The Reserve Bank of India has abolished prepayment charges on home loans with floating interest rate. However, if you opt for a fixed rate home loan, most lenders may levy pre-payment charges.

Don’t Opt for Pre-EMI, Pay EMI in Full

In case of an under-construction property, many homebuyers opt for Pre-EMI until they get the possession of the property. Pre-EMI refers to the monthly instalment that is paid only towards the interest component of the home loan, and not the principal amount. However, if you have sufficient flow of income, it’s advisable to opt for Full-EMI right from the beginning, without waiting for the property’s possession. This is because, the earlier you start with Full-EMI, the sooner you will be debt-free.  

Take a Home Loan at A Younger Age

By availing a home loan early on in life, you will have several years of employment ahead of yourself. This could significantly ease up your home credit loan repayment. Most banks and financial institutions provide home loans to individuals who have completed at least three years of employment. Therefore, if purchasing a property is amongst your top priorities, consider availing the loan at a younger age.

Now that you are well-versed with a few repayment options, ensure to make the most of it by following the tips that apply to you. Do not default on your home loan in any case as it can attract penalties. Furthermore, delaying on EMI payments can affect your credit score, which can make it difficult to avail any kind of loan in the future. To avoid all these hassles, it’s best to repay home loan within the stipulated tenure. Consider making use of the home loan EMI calculator to get an estimate of your EMIs beforehand. Also, do not forget to make a note of various charges such as the processing fee, interest rate, late payment penalties, etc. before availing a home loan. All these charges can play a crucial role in defining your overall cost of borrowing.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.