Purchasing a property like a house is difficult without help from a financial institution. And taking up a loan and repaying it without getting into a debt hole is equally important. However, there are ways in which you can repay your loan faster and without feeling the burden of the rising interests. Keep reading to find out.
Buying a home is a dream for millions and most resort to a home loan to make this dream come true. But, before you book your home and get a loan, it is important you chalk out a plan as to how you want to go about it. The equated monthly instalment (EMI), the rate of interest (ROI) and the tenure in which you wish to repay the loan are very important. Another factor to consider is the interest burden.
Interest rates on loans change from time to time, and if you’re not prepared for this change, the burden on you to repay instalments will worsen. To help you with this situation, here are five ways in which you can reduce your interest burden.
1.Choose Shorter Tenure
If you take a home loan for a longer tenure, you fill your EMIs for a longer period, which also means you will pay more interest. On the other side, shorter tenure means repayment of the loan faster and lesser cumulative interest amount. While this may increase the burden of EMI initially, it will get easier to manage with the yearly increment in your salary/earnings. However, make sure you are not overburdened with the EMI.
- Pay more than your EMI
Reducing your principal amount quickly will mean faster repayment of the loan and lesser interest to be paid. If you can, it is advisable to pay more than your due EMI amount. Also, if possible, you can pay an additional instalment in a year. This will significantly reduce your principal amount. One thing to keep in mind is always to keep your EMI amount less than 50% of your monthly income. This way, you can increase your EMI without any further burden.
- 5% EMI Increase Rule
To further reduce your interest burden and repay your loan faster, try to increase your EMI amount by 5% every year. With your annual increase in salary/earnings, this should not be much of a problem. Also, if you can combine this with the point mentioned above (paying more than the designated EMI amount), you can drastically reduce your principal amount and tenure thus reducing the total interest amount.
- Refinancing your Home Loan to Get Better Interest Rate
Another way to reduce your interest burden is to shop for loans that come with a more competitive interest rate. However, make sure you do all the calculations as to what difference will it bring to your total outgo (Both, principal and interest). Another tip is to shorten the tenure when re-financing. This can bring a significant difference to the interest outgo amount.
- Other Effective Ways to Reduce your Interest Burden
- At the beginning of the first year, if you can start by prepaying, it will help you repay the loan faster. Financial institutions and lenders do not charge a penalty for prepayment floating loan.
- Before you take your housing loan, do thorough research of the institutions offering the lowest interest rates. If after taking the loan you come across lesser interest rate offerings, you can transfer your loan to another lender. Refinancing with lower interest rates will significantly reduce your interest burden.
The most important thing to do before taking up a loan is to do thorough market research and look for the lowest interest rates. And after you have taken up the loan, these tips can help you reduce your burden of loan repayment to a great extent.