10 OCTOBER, 2022

Every person wishes to own their own home. The building or purchasing of a home is a significant milestone for most people; some rely on a house loan to cover the cost.

The days of saving for the entire life to realize the dream of purchasing a home are gone. Home loans have enabled people to purchase homes early in their careers. These instruments provide ample funding and allow you to repay comfortably over time. Despite the benefits of a longer repayment window, knowing how to reduce home loan tenure will enable you to reduce the total interest payable.

Tips for Shortening the Term of a Home Loan

There are some tested and true strategies for shortening your home loan tenure. Before applying for a house loan, new home loan borrowers can consider using the following tips to reduce their loan tenure:

1. Increase Your Down Payment

The RBI only allows lenders to provide easy home loans that cover 70%-80% of the property cost, with the borrower financing the remainder as a down payment.

If you make a larger down payment on your home loan, your principal loan amount will decrease, as will the interest on your EMI payments. Furthermore, a larger down payment improves your home loan eligibility and chances of loan approval by lowering your lending risk.

2. Select an Overdraft Facility

Consider adding an overdraft facility to your home loan account if you have a consistent income surplus. You can deposit any surplus accounts in the account along with the regular EMI amount. The deposit will serve as a pre-payment toward the principal amount as long as it remains in the home loan account.

As you make additional payments to your home loan account, the overall principal amount decreases, as does the interest charged and the home loan tenure.

3. Increase Your EMI Payments

Paying more than the stipulated EMIs is an easy way to reduce your maximum tenure for a home loan and, thus, your interest cost. You can reduce your debt burden by applying the excess funds to the additional home loan EMI payment.

You can pay more EMIs than are required each year - a 5% increase can significantly reduce the home loan tenure and the interest outgo.

4. Consider Pre/Part-Payments

If you have a surplus, you can make pre or part-payments on your mortgage if your lender allows it - some lenders charge a penalty for principal pre-payment. You can reduce the home loan tenure by reducing the outstanding amount and the interest outgo on the EMI payments.

5. Request for a Loan Restructure

During the home loan reset period, you may be able to request that your lender reduce the tenure on your loan. As your income grows, ask the lender to increase your EMI amount so your tenure shortens.

However, before requesting that your lender shorten the loan tenure of your home loan, make sure that your income can support the additional EMI burden.

6. Home Loan Transfer

A balance transfer involves the transfer of your outstanding home loan balance from your current lender to a new lender, usually for lower interest rates. You can, however, choose a balance transfer to shorten the maximum tenure for a home loan while maintaining the exact EMI amount. If unsure, use a home loan EMI calculator to calculate your new EMI.

The following factors typically determine a balance transfer:

  • The difference in home loan interest rates offered by the old and new lenders
  • The unpaid principal amount
  • The remaining home loan term

Undoubtedly, shortening the term of a house loan can reduce the overall cost of borrowing by lowering the interest outlay on the EMI payment. So, before applying for a home loan online, look for a suitable tenure.

7. Refinancing a Loan

Yes, loan refinancing can help you shorten the term of your loan. When you switch to a new institution, you have the opportunity to negotiate better loan terms, including restructuring the loan's repayment duration to better suit your financial goals.

Transferring the loan to a new lender and negotiating the terms is one of the best ways to reduce the loan tenure.

There are few delays because of this loan's quick loan processing protocols. To get started and take advantage of all the benefits available, apply online by providing basic information.

Which Should be Reduced, the EMI Or the tenure?

Borrowers are frequently torn between reducing the amount of their EMI or the term of their home loan. One should consider reducing their tenure to the EMI. Because lowering the EMI is a good option for those who use the money for investments in different entities or who can profit from it. Making a corpus fund or paying small amounts in installments will help to reduce EMIs. If you repay Rs 10,000 today, you will receive a Rs 30,000 benefit later.

Aside from the measures mentioned, one should also keep an eye on the repo rate and reverse repo rate the Reserve Bank of India provides from time to time (RBI).

Individuals should visit their respective banks to take advantage of this service because home loans are directly linked to the repo rate, and banks should pass on the benefits to the borrowers.

Conclusion

Applying for a home loan is the most practical way to obtain the funds needed to purchase your dream home. On the other hand, a home loan is a long-term financial product, and repaying the loan for 20-30 years may strain your finances.

You may miss a few EMI payments due to unforeseen circumstances such as job loss, illness, accident, etc. Missed EMI payments can harm your credit score and increase your loan liability.

The EMI amount is higher for a shorter home loan tenure, but the interest outgo is lower. As a result of the shorter tenure, the cost of borrowing is lower, and thus the overall property cost is lower.

Obtaining a loan is not difficult, but repaying the loan is. So, consider the options listed to ensure a smooth loan repayment process and reduce your EMI burden.

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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.