If you are determined to clear your home loan quickly, choosing a short tenor and scouting for a low-interest home loan will certainly help you in your endeavor. This is because the shorter the tenor, the lower will be your overall interest obligation on the loan. This, combined with a nominal interest rate, will significantly alter your EMIs, making them affordable and convenient. However, you can further reduce your cost of borrowing by way of prepayments. As your income increases courtesy of annual increments, bonuses or business growth, you can start prepaying an amount apart from your regular EMIs to clear your loan quicker or reduce your subsequent EMIs or loan tenor.
When you make a part-prepayment on your home loan, a lender may charge you prepayment fees of 2% to 4% on it. However, when you have a home loan on a floating interest rate, you do not need to pay any prepayment charges. For instance, when you take a home loan from Bajaj Finserv at a floating rate, you pay zero prepayment charges apart from enjoying a loan amount of up to Rs. 3.5 crore. To get a fair idea, utilize the home loan prepayment calculator to know the exact calculations.
Now that you know beneficial it is for you to make prepayments on your home loan, here’s how you can plan for it efficiently.
Use Incentives and Bonuses towards Reducing the Outstanding Amount
Your top priority as a home loan borrower should be to reduce your loan liability quicker than its expected tenor. This will help you pay less as total interest. You can start by putting aside your extra income in the form of a bonus or any incentives you receive. This way you can make regular prepayments on your home loan.
Save Every Month to Prepare a Corpus for Prepayment
Following a monthly budget ensures that you do not overspend, pay your home loan EMIs on time, and save enough to make a prepayment. Since most lenders require you to prepay an amount that is greater than one EMI, you can save diligently every month towards a prepayment amount that decreases your overall principal. Reduce unnecessary expenses or start automatic savings plan to do this with ease.
Make Investments that Help You Make Prepayments
Invest in instruments such as fixed deposits and mutual funds to generate a source of income that can help you part-prepay your home loan. This leaves income from active sources untouched and gives you the flexibility to meet other financial commitments.
Using the above tips, you can master the task of prepayment for your home loan within a short span of time without compromising on your standard of living. You can use the home loan prepayment calculator to see the impact of paying off your home loan over and above your EMIs to be further inspired.
If you cannot make a large one-time payment to reduce your loan burden, do not fret. A minor increase in your EMIs will also chip away the loan tenor steadily over time. You can increase your EMIs by talking to your lender as per your salary increments every year.