How to Repay Your Home Loan Faster

With the economic progression of India and on the wings of home loans at an easy and affordable interest rate and various initiatives by Government of India’s project ‘housing for all’, people take home loans and build their nests. Usually, an individual taking loan builds his/her own nest on easy EMI option either a monthly or quarterly basis from banks or any other financial institutions. After the withdrawal of home loan, people get trapped into a vicious cycle. Earlier, I have mentioned in various occasions the benefits of getting debt free. It is advised that you should pay off your home loan as early as possible. Here we will discuss how to repay your home loan faster.

Increase the EMI amount i.e. Step Up EMI

The shorter the term of repay of the loan amount is the lesser the amount you have to pay. Suppose, you receive a monthly salary of Rs. 50,000/-. You have taken a home loan of Rs. 40 lakh for a term of 20 years at an interest rate of 8% per annum. In this case, you will be subject to pay around Rs. 40 lakh including the amount and interest. So, your monthly installment or EMI will be approximately Rs. 16,728/-. It means you are paying 33% of your salary to repay your home loan.

Loan amount Rs. 20,00,000/-
Principle paid Rs. 20,00,000/-
Interest paid Rs. 20,14,914/-
Total repayment paid Rs. 40,14,914
Monthly repayment EMI Rs. 16,728/-
Loan Term 20 years

Now let’s assume your income is getting increased by 10% every year. It is advised that you should take this salary hike as an opportunity to repay your home loan quickly. If you hike your EMI by 10% on yearly basis, you are supposed to repay your home loan by a tenure of 1 year shorter and thus you can save Rs. 2 lakh.

Loan amount Rs. 20,00,000/-
Principle paid Rs. 20,00,000/-
Interest paid Rs. 18,14,914/-
Total repayment paid Rs. 38,14,914
Interest saved Rs. 2 Lakh
Loan tenure 19 years
Make extra payment with bonus or incentives

Job holders irrespective of govt. or private sectors receive some extra emoluments namely bonus, incentives etc. throughout a year. So, whenever, you receive some bonus or extra emoluments, just use this corpus to pay off your home loan. You can use this money to repay the debt at a time. If you receive Rs. 50,000/- year-on-year basis and use this money to repay the debt you can save Rs. 2 lakhs on interest and repay your home loan 1 year less than the loan term.

Loan amount Rs. 20,00,000/-
Principle paid Rs. 20,00,000/-
Interest paid Rs. 28,14,914/-
Total repayment paid Rs. 38,14,914
Interest saved Rs. 2 Lakh
Loan Tenure 19 years
You can give up some luxurious habits
Skipping at least 2-weekend dinners in a month

There are many families who go out for dining every weekend. If you have such kind of habit you can skip at least two-weekend dinners in a month. You can go out for dinner at alternate weekends. Suppose you are a bank employee having holidays on 2nd and 4th Saturday of a month. You can dine out in 2nd and 4th weekends.

We assume your family consists of four members including self, spouse, and two children. Usually, the cost of every weekend dinner is around Rs. 1000/- per week.

Assuming 4 weekends in a month you approximately spend Rs. 1000×4 = Rs. 4000/- by dining out each weekend.

If you dine out for 2 weekends in a month then your cost is = Rs. 1000×2 = Rs. 2000.

So, by skipping two-weekend dinners you can save around = Rs. 2000/- per month i.e., Rs. 24000/- per year.

Use a bike or Public transport instead of 4 wheeler car

Suppose, the distance between your house and your workplace is 10 km approximately. So, every day you have to make a two and fro journey of total 20 km. If you go alone to your office then you can use a bike or public transport instead of a four-wheeler car. Let’s make it clear with an example.

The to and fro journey between your home and workplace is 20 km.

An average 4 wheeler car gives a mileage of 8 km per litre petrol.

So you need to buy a petrol of = 20 km / 8 = around 2 litres.

Your approximate consumption of petrol or diesel for a month is = 2 litre × 30 days = 60 litre.

So, your total cost for a month= 60 litre × Rs. 80 = Rs. 4800/-.

Now in the case of a bike,

An average bike gives a mileage of 30 km per litre petrol.

Total distance covered by a bike = 10 km × 30 days = 300 km.

Your approximate consumption of petrol or diesel for a month is = 300 km / 30 km = 10 litre.

So, your total cost will be = 10 litre × Rs. 80 = Rs. 800/-.

Your total savings is = 4800-800 = Rs. 4000/- per month i.e. Rs. 48000/- per year.

You can use the above-mentioned amount to reduce your principal amount. if the principal amount reduced then your interest payable will also be reduced.

Start investment or repay the home loan

It is the biggest jargon whether an individual should repay the home loan early or he can start or carry forward his investments in different schemes. This problem contains several aspects.

Condition 1

Let’s assume, an individual gets a monthly salary of Rs. 50,000/-. After repayment of home loan EMI and mandatory household expenses, he is left with Rs. 5000/-. Now, if he thinks to invest this Rs. 5000/- in FDs, NSC, PPF, etc. it is better to pay off the house loan. It is because all these schemes yield an interest lower than the home loan interest. So, the respective individual can repay his home loan quickly instead of making an investment in the above-mentioned options.

Condition 2

The individual can invest this remaining savings i.e. Rs. 5000/- in any equity oriented mutual fund or direct equity, he can be steer clear of making an investment. Usually equity asset class has delivered a historically returns around 15-16% over a long-term horizon. On the other hand, the home loan interest rate is 8%. So, you can gain a 7%-8% return per year.

While repaying your home loan quickly you need to consider the following points of caution.

  • Before taking a home loan, you must reserve an emergency fund of at least 3 months’ salary or income.
  • You should prepare a chart how you can repay your home loan quickly. A shorter term of loan repayment will save a lot of money which will improve your financial health in the future.
  • You must read the terms and conditions carefully imposed by your loan issuer. You should also be aware of the various clauses i.e., floating interest rate, processing charge, etc.
  • Finally, you should pay the EMIs via your bank account so that you have a proof of your payment. In case there is any discrepancy by mistake you can proof your payments.

Read also: 6 ways to get a Loan Quickly with Affordable Interest rate

Read also: Retirement Planning : How to Make a Successful Retirement Plan

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