Lenders like SBI or HDFC provide SBI Home Loan or HDFC home loan, respectively, for up to a period of thirty years or until the borrower’s retirement age, whichever is earlier. Due to the long repayment tenure, the total interest component in a home loan can easily extend the principal component. Owing to this reason, many of you may look to close your home loan before the loan’s maturity. In case you are one of those looking to close your loan as early as possible, listed here are some tips that can assist you in managing the same smartly.
Go for a home loan balance transfer loan.
HLBT or home loan balance transfer enables you to move all your outstanding loan proceeds to another home loan lender at a comparatively lower rate of interest. The lower rate of interest allows you to lower your interest component and EMI. Opting for the same home loan EMI might allow you to close the deal of your loan much earlier than your original loan tenure.
When to opt for the home loan balance transfer?
Transferring your home loan balance in the initial years of loan repayment tenure allows you to get higher savings in interest components. EMIs in the starting years mostly consist of interest components. Consider taking a repayment tenure extension just when you are looking for a lower EMI.
The home loan balance transfer rate of interest is generally the same as regular home loan interest rates. However, there are some lenders that offer distinct interest rates for balance transfer cases.
Prepay your home loan with your surplus funds whenever possible
When prepaying your home loan partially, you usually have the choice to either reduce your EMI or repayment tenure. In these cases, go for repayment tenure reduction while keeping loan EMI the same as before. Lowering your loan repayment period would result in extremely higher savings on overall interest payout, while reducing your loan EMI would lower your EMI burden. Thus, those applicants who are comfortable repaying their existing loan EMIs must go for repayment tenure reduction.
According to the guidelines by RBI, NBFCs and HFCs are not permitted to charge prepayment fees on home loan prepayments or other retail loan prepayments lent on floating rates. Hence, you must try and prepay your home loan whenever you have any surplus funds. However, prepayment must be done with zero compromises on your contributions towards financial goals, as this may push you to take up expensive loans in future. Thus, prepay your home loan just when you have sufficient funds after factoring in your contingency funds, monthly contributions and investments set aside to mitigate your crucial financial goals and important funds earmarked for other liquidity linked requirements.
As a home loan applicant, you can also consider taking up a home loan overdraft option to benefit from prepayments while maintaining your liquidity. Availing of home loans with an overdraft option permits you to deposit surplus funds in the linked overdraft account, which can be either a current or savings account. When computing the interest constituent, the average balance maintained in the overdraft account is reduced from the outstanding principal component in the loan account. Thus, any surplus amount parked in your overdraft account comes across as prepayment against the outstanding principal, thus lowering the overall interest component of the home loan.
Likewise, you can withdraw your funds from the overdraft account whenever the requirement comes up. If your existing lender doesn’t permit you to take up a home loan overdraft option, look forward to transferring your outstanding loan balance to a new home loan lender offering the overdraft option. Few lenders providing the home loan overdraft option include SBI home loan, HDFC Home Loan etc.
Go for home loan variants providing increasing EMIs.
Out of different loan types available, the home loan has the longest loan tenure. Many lenders generally provide a home loan for as high as 30 years. During such long periods, borrowers’ income is expected to rise, particularly in the case of salaried individuals. In case you expect your monthly income to rise with time, try enhancing your EMI for a home loan gradually. There are many lenders of home loans like HDFC Bank and ICICI Bank that provide high flexibility to customers to enhance their loan EMIs each year in proportion to increment in incomes, thus assisting such customers in repaying the home loan faster. Such an option also enhances your home loan eligibility as, in these cases, lenders even factor in future earning potential of prospective borrowers.
You can avail home loan for a repayment tenure of as high as 30 years. Often, applicants prefer the highest possible repayment tenure, depending upon their loan eligibility. It lowers the EMI pressure on such borrowers and makes it simpler for them to easily manage all their finances. However, the longer your repayment tenure, the higher is your loan interest component. Thus, as your income rises, you can factor in ways to accelerate your loan repayment to come out of debt faster. There are various ways to clear off your debts. Pre Closing and prepaying your loan is the second way.
Prepaying or pre-closing a loan refers to closing your dues with a single payment. Prepayment refers to making part payment on the loan over and above your loan EMIs. It saves you interest that you no longer require paying along with loan EMIs. Your savings and income can be diverted to the achievement of other crucial goals, like a child’s higher education etc. Pre closing a loan can be advantageous for you if you do it in the correct way.
So, let us know how you can easily optimize your pre closure and prepayments –
What is pre closure?
Home loan pre closing refers to the closing of a loan before actual tenure completion. For instance, consider your repayment tenure is twenty-five years. After repaying EMIs for fifteen years, your outstanding loan equals Rs 10 lakh, and you write a cheque to the lender of this amount to prepay the dues in a single shot. Thus, your home loan is pre closed, i.e., paid off ten years before its time. After this, you are debt-free and instantly reclaim your property documents from the concerned lender.
What is prepayment?
Prepayment is even a medium to gradually pre close your home loan. For instance, your EMI equals Rs 50,000, but you decide to pay an amount of Rs 2 lakh per month. The amount over & above the interest and principal due for a specific month is considered a prepayment. Thus, if your interest and principal that month were 33,000 and 17,000, respectively, paying an additional amount of Rs 1.50 lakh monthly makes your principal repayment Rs 1.67 lakh. Making such prepayments regular thus accelerates your loan repayment, assisting you to pre close faster.
According to the guidelines by RBI, banks or other financial institutions do not levy any prepayment or pre closure fees on floating rate loans.