Introduction
Home ownership is a fantasy for most individuals and families. While home ownership creates emotional security and long-term monetary worth, the process most often starts with a home loan. Home loans normally have long tenures of repayment which extend up to thirty years based on the age income and eligibility of the borrower. Even though such long tenure helps decrease the burden of monthly repayment it also enhances the overall cost owing to compounding interest.
Shortening your home loan tenure can enable you to attain financial freedom earlier than planned. It helps you save a lot of money in the long term and opens up your income for other investments and purposes. This article provides realistic and actionable steps to decrease your home loan tenure and become debt-free earlier.
Understanding How Home Loan Tenure Affects Interest
The longer the loan period the higher interest you pay in the long run. Even if the monthly payment or EMI is within reach the cost of borrowing over decades proves to be massive.
For instance, take the example of a loan of twenty lakh rupees with an eight percent interest for a period of twenty years. The interest amount paid during the entire period could be almost the same as the loan amount. But if the same loan has to be returned within fifteen years of time rather than twenty the total interest will decrease substantially.
Therefore, shortening the tenure of a loan not only allows you to eliminate debt earlier but also keeps your total financial burden low.
Why You Should Try to Shorten Loan Tenure on Your Home
There are many good reasons why shortening the home loan tenure should be on your agenda
- You pay a significant amount of interest
- You become financially independent at an earlier age
- You are able to pursue other objectives like retirement planning or education of children
- You minimize your liability which enhances your creditworthiness
- You gain peace of mind by being debt-free
Making Partial Prepayments Regularly
One of the best ways to lower your home loan duration is by doing partial prepayments. These are extra payments done on your loan apart from your regular monthly EMI.
Prepayments directly cut down the amount of the loan. As soon as the amount decreases the interest is charged on the decreased amount which automatically reduces the loan term.
You can utilize funds such as
- Annual bonuses
- Refunds of tax
- Incentives and commissions
- Savings on lower expenditures
Although it may not be possible to make a big prepayment a series of small but frequent prepayments can go a long way in the long run. Most banks do not levy any prepayment penalty on housing loans particularly if the loan bears floating rate of interest.
Boost Your EMI as Income Grows
With professional advancement income tends to rise with time. Rather than escalating your lifestyle expenditure, think about escalating your EMI contribution. Raising your EMI reduces the principal repayment immediately and benefits you by prepaying the loan sooner.
For example if your EMI for every month is twenty thousand and you raise it by only two thousand every year the total effect on the duration of the loan will be immense. Utilize online EMI calculators and check how the hike in payment will reduce the duration.
Most lenders permit you to raise your EMI amount in a simple way by making a request. Be sure to do this in a formal manner so the additional payment is reflected appropriately in your amortization schedule.
Opt for a Shorter Tenure in the Initial Stage
When you take a home loan you are offered the choice of selecting your repayment term. Though the lure of smaller EMIs may tempt you to go for a longer term it is economically wiser to select a shorter term if you can manage the EMI.
For example a fifteen-year loan will have higher EMIs compared to a twenty-year loan but you will pay far less in interest over time. Moreover you will become debt-free five years earlier which gives you more financial flexibility.
If price is not a concern it is advisable to take a shorter loan term from the start. If things change later and you need greater flexibility you can always renegotiate with the lender.
Refinance or Transfer Your Loan
With time market rates change and there are chances that new lending institutions give more favorable terms. Refinancing or shifting your home loan to another institution with a lower rate can assist you in decreasing the total tenure.
For instance if you move from an eight percent interest to a seven percent interest on a twenty-year loan the interest saving difference can be huge. Instead of lowering your EMI you can maintain the same and employ the lower rate of interest for reducing your tenure.
Prior to refinancing always look for
- Processing charges
- Attorney fees
- Balance transfer costs
- New lender reputation
The objective must be to make sure that overall savings from refinancing are greater than the costs incurred in doing so.
Use Windfall Gains Wisely
Windfall income in the form of unexpected inheritance monetary gifts lottery windfalls or asset sale profit can be used intelligently. Rather than spending the whole amount on discretionary spending, use a huge chunk to pay off your house loan.
This single payment can reduce your principal considerably and shave years off your repayment period. Although such income is not anticipated planning its utilization well can lead to quicker debt settlement.
Adhere to a Strict Monthly Budget
Establishing a realistic and thought-out monthly budget enables you to manage your expenses and determine where you can save. Channeling these savings into your home loan repayment will enable you to make extra payments and short-circuit tenure.
Monitor your income and expenditure
Determine wasteful expenses
Establish financial priorities
Automate savings
By becoming more efficient with your money you enhance your ability to make extra payments on the loan.
Refrain from Taking New Loans When Repaying
Taking new loans or credit card loans while already paying off your home loan will extend your financial boundaries. It can also decrease what you can put towards extra payments on the home loan.
Prioritize paying off your home loan first before acquiring other liabilities like car loans personal loans or consumer durable loans. Paying off your debt load maintains your credit score healthy and enhances overall financial security.
Be Flexible with Loans
Selecting the lender involves considering the flexibility in repayment they provide. Certain banks and housing finance companies offer options like
- Part-prepayment free
- Holiday EMIs in tough months
- Interest reset flexibility
- Online loan management features
All these facilities help you manage your loan better and utilize your excess funds more optimally. Read the terms and conditions carefully and ask questions prior to signing the agreement.
Automate Your EMIs and Prepayments
Automating your EMI payments by standing instructions or auto-debit ensures that payments are never delayed. This keeps your credit record intact and saves you from penalties.
Certain financial institutions also provide for automatic deduction of extra amounts over and above the EMI. You can instruct them to deduct a specified extra amount each month towards the principal. This over a period of time gives you lower interest and shorter tenure.
Remain Committed and Monitor Your Progress
Prepaying a home loan is a medium- to long-term exercise, which demands both discipline and perseverance. It should be monitored by tracking your progress at periodic intervals.
Maintain a record of all EMIs paid
Jot down all prepayments done
Compute reduction in tenure every now and then
This keeps you motivated and allowed to change your strategy, if necessary. Celebrate small victories such as achievement of twenty five percent or fifty percent of your loan to sustain the momentum.
Plan Financially with Your Spouse or Family
If you are married or have a family engage them in your loan repayment plan. Make your financial objectives align and both partners agree on the necessity of becoming debt-free.
When both incomes are being channeled towards one goal it becomes simple to make extra payments and make adjustments in the household budget. Communication and cooperation enhance financial decision-making and decrease misunderstandings regarding money.
Final Thoughts on Reducing Home Loan Tenure
Clearing a home loan ahead of schedule may seem like a difficult task initially but with careful planning consistent effort and financial discipline it is entirely possible. Reducing the tenure of your home loan not only leads to substantial interest savings but also brings the satisfaction of owning your home free of debt.
Begin with knowing your loan terms make a budget and consistently build up your EMI or opt for regular prepayments. Beneficially use income growth and stay away from extraneous spending or loans. Refinance if there is a better interest rate.
Financial freedom starts with tiny steady steps. When you free yourself from debt sooner you are opening the gates to fresh new opportunities investments and a debt-free financial life. Act today and work consistently towards your aim of becoming free from home loan debt.
