1.Keep loan tenure as short as possible
The longer the tenure of a loan, the higher the interest burden. The compounding works against the borrower and inflates the interest outgo. For instance, if you take a Rs.50 lakh loan at 9% for 10 years, you will pay a total interest of Rs.26 lakh on the loan. Extend the tenure to 15 years and the interest outgo shoots up to Rs.41 lakh. On a 20-year loan, the interest outgo is Rs.58 lakh. The borrower will pay almost Rs.5.4 lakh in the first year of a 20-year loan, but a large chunk of this will go in paying the interest. The principal outstanding will come down by only Rs.93,000. Even if we assume that the interest rate will not remain static at 9% for the full tenure of the loan, the borrower will still end up paying a lot of interest. This is why experts suggest that borrowers should try to keep the loan tenure as short as possible.2.Increase EMI when income rises
A short loan tenure can be very challenging because the EMI shoots up. Young people aspiring to own a house may not be able to fit very high EMIs into their budget. If you are forced to go for a longer tenure of 15-20 years, it’s a good idea to gradually increase the EMI amount. Increasing the EMI by 5% can shorten the tenure of a 20-year loan by almost eight years. If you tighten your belt and increase the EMI by 10% every year, the loan will end in just 10 years (see table).
Prepayment is not as difficult as it may appear. If you expect your income to rise by 8-10% every year, hiking the EMI by 5% will hardly pinch your household budget. Just keep in mind that prepayment has a bigger impact when the loan is new, so increase the EMI as soon as possible. Any surplus cash, such as a maturing investment, a gift or an annual bonus, should also be used to prepay the loan.
Reduce home loan tenure by hiking EMIs
If you take a loan of Rs.50 lakh at 9% for 20 years, the EMI will be Rs.44,986.
3.Check if lender has sold insurance
It’s a good idea to take life insurance when you take a big-ticket loan. In case something untoward happens to you, your dependants will not be burdened with the unpaid debt. However, the life insurance that banks try to sell along with the home loan is not very useful because it is linked to the loan. They offer insurance for the unpaid loan amount and this cover decreases with every EMI that is paid by you. If the borrower passes away during the loan term, the insurance company pays the outstanding loan to the lender.
Besides, such loan insurance is often tied to a specific loan and may not be transferable if the loan is refinanced. If you decide to switch the lender during the tenure of the loan, the insurance policy will terminate. It is, therefore, better to buy separate term insurance because the cover will continue even if you prepay the loan or change your lender.
4.Understand link between benchmark and loan rate
Most home loans are floating rate loans and linked to an external benchmark. The RBI allows banks to follow any of the various benchmarks. The most common is the RBI repo rate, which has remained unchanged at 6.5% since June 2023. The lender fixes the reset period, which can be quarterly, half-yearly, or annually. Find out the periodicity of the reset before you take a loan. Opt for a loan that has a quicker transmission of the changes in the external benchmark rate.
5.Consider joint home loan with spouse
To encourage home purchases, the government offers tax benefits on home loans. Under Section 24b, up to Rs.2 lakh interest paid on a home loan can be claimed as a deduction. However, rising home prices mean that the average home loan is much bigger than it was about 4-5 years ago. In 2023-24, 30% of the loans were above Rs.75 lakh. At the prevailing rate of 9%, the annual interest of a Rs.50 lakh home loan for 20 years works out to about Rs.4.5 lakh. If you have a working spouse, you can together claim up to Rs.4 lakh deduction if both husband and wife take a joint home loan and both claim Rs.2 lakh deduction individually.
There are other benefits of a joint home loan. Some states charge lower stamp duty if the property is registered in the name of a woman. For instance, in Delhi, the stamp duty for male buyers is 6%, while female buyers have to pay only 4%.
