Introduction
A home loan is perhaps the largest financial commitment people make to realize their dream of having a home. Although it gives instant funds for buying a home, the long repayment duration usually means that a huge interest cost is paid. Home loans have repayment tenures of fifteen to thirty years, and the longer the tenure, the more total interest one pays.
Most borrowers want to shorten their home loan period to become debt-free earlier and save on interest expenses. It is possible to decrease the loan period without causing undue burden on monthly finances by adopting the right strategies. This article offers a complete guide on how to lower home loan tenure effectively and become financially free sooner.
Why Should You Reduce Your Home Loan Tenure
Shortening the tenure of a home loan has several financial benefits. Some of the most important advantages are:
Lower Interest Payment
The longer the loan tenure, the higher the interest paid in the long run. By reducing the loan tenure, a borrower can save a huge amount of money by paying much less interest over time.
Faster Financial Freedom
A home loan is a long-term financial liability that restricts cash flow and financial flexibility. By prepaying the loan, borrowers are able to get rid of debt stress and devote time to other financial objectives like retirement planning, investments, and wealth accumulation.
Greater Savings for Future Investments
Paying off a home loan early means that the money previously allocated for equated monthly installments can be redirected toward savings, investments, or emergency funds. This ensures better financial security and wealth growth.
Improved Credit Score
An early and timely payment of a home loan benefits the credit score of the borrower. The higher the credit score, the better is the financial credibility and the better are the chances of availing future loans or credit cards at reasonable interest rates.
Less Financial Burden in Later Years
Longer loan durations usually carry over to retirement years, subjecting borrowers to more financial burdens. Reducing the tenure of home loan allows one to pay off debt earlier and live a tension-free post-retirement life.
Measures to cut Home Loan Tenure Effectively
Opt for a Shorter Loan Tenure Initially
When applying for a home loan, selecting a shorter tenure is one of the most effective ways to reduce interest payments. Though shorter tenure leads to higher monthly installments, it significantly decreases the overall interest burden.
Before deciding on a shorter tenure, borrowers should assess their financial capacity and ensure they can afford higher equated monthly installments without straining their monthly budget.
Enhance the Equated Monthly Installment Amount
To take a greater monthly installment in the first instance is an optimal method to lessen the home loan tenure. Scheduling a bigger monthly installment depreciates the unpaid principal earlier, which leaves fewer interest payments as the tenure extends.
Borrowers can employ a home loan calculator to find a best-fit installment size that optimizes affordability and financial security.
Regularly Make Partial Prepayments
Prepaying a home loan through lump sums cuts down substantially the amount outstanding and shortens the repayment period. Prepayments are especially advantageous during the initial years of the loan, since the lion’s share of the installment goes towards repayment of interest.
The borrowers can utilize financial gains like annual bonuses, salary increases, tax refunds, or investment income to undertake partial prepayments. Prior to making prepayments, they should look for any prepayment charges levied by the lender.
Increase the Equated Monthly Installment with Salary Hikes
A majority of salaried individuals receive annual salary increases. Instead of boosting lifestyle costs, borrowers can use a part of the salary increase to boost the monthly installment size. Even a marginal increase in the installment size can lower the home loan term considerably and interest outgo.
Increasing the installment every time a salary increase is received, borrowers can lower the loan term without resorting to cutting back on expenses.
Make Biweekly Payments Instead of Monthly Payments
Rather than paying a single installment amount each month, the borrowers can choose to pay biweekly. This implies paying half of the monthly installment every fortnight. As there are fifty two weeks in a year, paying biweekly amounts to twenty six half payments or thirteen full payments in a year. This additional installment each year assists in lowering the loan period and interest expense considerably.
Bi-weekly payments also assist in quicker reduction of the principal, thus lessening the total financial load on the borrower.
Consider Home Loan Balance Transfer to a Lower Interest Rate
When a borrower is taking a higher rate of interest for a current home loan, consolidating the loan into another lender providing a better interest rate would prove to be effective. The borrowers can avail of home loan balance transfer facility for transferring the loan to some other lender having lower interest rates.
A reduced interest rate translates into a reduced interest burden and quicker loan repayment. Nevertheless, prior to selecting a loan transfer, borrowers need to factor in the processing charges and other costs involved to ensure that the transfer yields net financial savings.
Use Windfall Gains to Repay the Loan Early
Surprise money like an inheritance, gains from sale of property, investment maturity proceeds, or performance bonuses can be utilized to prepay the house loan. Rather than utilizing windfall income for discretionary spending, applying it towards paying off outstanding loan balance can assist in becoming debt-free sooner.
A single lump sum prepayment can greatly reduce the loan period and lower the interest burden.
Cut Down on Extraneous Spending and Boost Savings
Discipline in money management is key to loan repayment. By limiting discretionary spending like high-end purchases, eating out, or high-priced holidays, lenders can divert more money to prepayments or higher monthly payments.
Establishing a proper budget and monitoring expenditures can determine areas where savings can be enhanced. The extra savings can then be utilized to repay the home loan earlier.
Invest in High-Return Financial Instruments
Instead of paying the home loan directly, the lenders can invest in investment products that yield a rate higher than the home loan interest rate. For instance, if the home loan interest rate is eight percent and an investment opportunity in the form of mutual funds offers twelve percent return every year, the additional four percent return can be utilized to make prepayments on the loan from time to time.
Though, market-linked investments carry risks, hence the borrowers must test their tolerance for risk before opting for this plan.
Don’t Take Extra Loans
Taking extra loans, like personal loans, auto loans, or credit card loans, can add to financial burdens and reduce the flexibility of making prepayments on a home loan. Avoid borrowing unnecessarily and focus on paying down outstanding debt.
By keeping debt obligations minimal, borrowers can focus on home loan repayment and achieve financial freedom sooner.
Common Mistakes to Avoid While Repaying a Home Loan
Many borrowers unknowingly make financial mistakes that prolong their loan tenure and increase the total cost of borrowing. Some of the common mistakes include:
- Paying only the minimum installment amount without making extra payments when possible
- Overlooking loan balance transfer facilities in spite of the possibility of lower interest rates
- Utilizing annual bonuses and salary increases on discretionary expenses rather than paying off the home loan ahead of time
- Not keeping an emergency fund, which results in taking high-interest loans in times of financial emergencies
- Not checking loan statements from time to time to monitor repayment status and detect mistakes, if any
Long-Term Benefits of Reducing Home Loan Tenure
Early repayment of a home loan is not just financially helpful in the short run but also financially secure in the long run. Following are some important advantages of lowering your home loan term and paying off your debt quickly.
Improved Financial Security
A home loan is a long-term financial burden that can extend for decades. By shortening the tenure and prepaying the loan, you remove a huge recurring expense from your financial obligations. This gives you a great sense of security and enables you to concentrate on other vital financial areas like investments, retirement planning, and education for children.
Increased Home Equity Ownership
When you borrow a home loan, the lender has a lien on your property until the loan is paid in full. Until then, you are not the complete owner of your house. Prepaying the loan guarantees full ownership, boosting your home equity and allowing you to have full ownership of your property.
Once you are the full owner of your home, you can also use it for financial gains like obtaining a loan against property for business growth, investment purposes, or other significant financial requirements.
Less Mental and Emotional Stress
Financial burdens frequently give rise to stress and anxiety, particularly when servicing numerous loan repayments. The longer the term, the more you might feel financially pressured. Early repayment of your home loan ensures peace of mind and mental tranquility. Being free of a significant debt commitment gives you confidence and flexibility in making life decisions.
Increased Loan Eligibility in the Future
If you want to take another loan, like a business loan or an education loan for your child, lessening your home loan burden will make you more eligible. Lenders assess your financial obligations before approving fresh loans, and already having a long-term debt may restrict your borrowing capacity. Paying off your home loan early enhances your financial record, which helps you obtain loans at favorable terms.
Additional Disposable Income for Other Financial Objectives
After your house loan is repaid in full, the funds that were previously being used for equated monthly installments can be diverted into other financial objectives. These might include investing in property, setting up a business, adding retirement savings, or paying for large life expenses like holidays or remodeling your home.
Savings on Tax Deductions
Home loan borrowers often claim tax benefits on principal and interest payments under the Income Tax Act. However, once the loan is repaid, these tax benefits will no longer be available. While reducing your tenure might mean losing some tax benefits in the long run, the interest savings usually outweigh the tax deductions. It is important to evaluate your tax-saving strategies and consult a financial advisor before making any major prepayment decisions.
