A home loan is a long-term financial obligation which is repaid in Equated Monthly Installments or popularly known as EMIs. Moreover, the time range for home loans can vary between one to thirty years. This implies that your home loan EMIs form a large chunk of your monthly expenses that too, for a long period of time.
You may want to look at repaying your home loan earlier than the specified tenure to obtain freedom from the long-term financial obligation. Naturally, your next step be: “Will I have to pay a penalty if I choose to pre-pay my home loan before the specified tenure?” In the past, financial institutions have levied penalties for pre-payment of loans however, new directives from RBI forbid lenders to levy such charges. Finserv MARKETS does not levy charges for home loan pre-payment or foreclosure.
Here are the three most popular ways in which you may repay/close your home loan earlier than the stipulated tenure:
1. Increased EMI amount
Lenders often limit the EMI outflow between 40- 50% of your monthly net income. Hence, your EMI outflow will remain constant even when your salary / financial inflow increases every year. This implies that your EMI to Income ratio (agreed upon at the time of loan approval) keeps changing every year with an increase in your salary. Therefore, it is recommended that you keep increasing the EMI amount on a yearly basis to maintain the ratio as well as repay your loan early!
2. Utilization of additional income
Several employers pay an annual bonus to their employees. It is advisable that you use this additional income to repay a part of the outstanding loan balance. Prepaying the loan amount not only reduces your monthly financial burden but also helps save a significant amount in the long run.
You may also contemplate investing the annual bonus to earn investment returns. Finserv MARKETS offers investment plans that can be of great help. Financial experts recommend that from a financial planning perspective, an individual must compare the expected rate of returns and the home loan interest rate to make an informed decision regarding loan prepayment. If the investment returns are more than your home loan interest rate then, it makes sense to invest your finances. However, if the interest rate is equal to or higher than the expected returns, making an investment for loan prepayment is financially prudent.
3. Determine the right time to repay
Each EMI is essentially divided into two parts: one being the principal and the other being the interest. During the initial years of your loan tenure, a higher percentage of your EMI is dedicated to the interest component. However, over the course of your repayment tenure, the situation reverses and a significant portion of your EMI gets dedicated towards the principal repayment. Therefore, prepaying the loan amount during the initial years is beneficial. This will effectively reduce the interest payout on the loan amount. However, you must do a detailed analysis to determine your exact savings and know the right time to prepay the outstanding loan balance. Investing to earn returns is not the only way to save money. Being able to reduce the interest burden on your loans is also money saved! Therefore, be smart about prepayment of your home loan before its due date to reduce your overall cost of borrowing. However, ensure you have a contingency fund that may be used in case of emergencies before you decide to prepay the outstanding housing loan balance.
4.Choose a suitable loan repayment period
- While availing a loan, it is advisable to settle for a suitable loan term by evaluating your finances carefully. Also, make sure that you do not over-borrow. Financial institutions generally consider 35% to 50% EMI to income ratio depending upon the income of the borrower.
- If you opt for a longer repayment period, your monthly installments will be reduced. Therefore, you won’t have to spend a large portion of your income towards home loan repayment. This will help you strengthen your cash flow. As and when you have additional funds, you can utilize them for the repayment of the loan as there are no prepayment charges.
With Finserv MARKETS, availing a Bajaj Finserv Home Loan online is easy, convenient and completely hassle-free. So why wait? Get your home loan with us today and realize your dream of owning your dream home!
“Finserv MARKETS, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!”