After countering an economic slowdown in 2020, India is gradually coming out of recession. The GDP grew 1.6% in the fourth quarter of 2020-2021. The Gross Value Added (GVA) also registered a growth of 3.7% in Q4 of the same period.
As a ripple effect, the income of salaried individuals is also likely to increase almost by 6.4% on an average in 2021, says a Wills Towers Watson survey. With sufficient disposable income, individuals can now avail a home loan against a reduced tenor with ease.
Existing borrowers can also reduce their home loan interest burden by cutting the loan tenor short. Following is a look at how to reduce the tenor and maximise savings effectively.
Ways to decrease home loan tenor and maximise savings
Typically, a home loan accompanies a tenor of up to 20 years. While it allows individuals to service affordable EMIs, the interest outgo might increase significantly. Nonetheless, if a borrower has sufficient cash flow, he/she will be able to repay the loan faster with increased EMIs.
Following are some of the most effective ways to reduce home loan tenor and save on interest.
- Apply to increase EMI payable
Individuals with a spotless credit history are eligible to negotiate loan terms with their existing lender. However, before approving the same, lenders assess several factors, including the FOIR of the applicant. If the FOIR is less than 40%, a lender is likely to approve the application.
There are two possible ways to reduce FOIR – increase income or reduce fixed obligations. In case you are servicing a home loan, and any of these instances improve your repayment capacity, you can apply to increase the EMI payable.
With increased EMIs, you can repay the loan faster within a shorter tenor. However, you can always opt for the assistance of a home loan EMI calculator to estimate monthly instalments and interest payable.
- Opt for part-prepayment
Another way you can trim your home loan tenor is by opting for part-prepayment. It allows you to repay a lump sum amount when you have surplus funds. You can utilise income from incentives, bonuses, earnings from investments, and other sources to make the prepayment.
It helps in reducing the tenor and also the interest payable. For instance, an individual opted for a home loan of Rs.50 lakh for 10 years with an interest rate of 7.5%. Now he/she earns Rs.20 lakh from prior investments and decides to pay the amount towards loan settlement. In that case, the new EMI would come down to Rs.35,611 from Rs.59,351, or the tenor would reduce to 61 months or 5 years and one month.
Hence, part-prepayment is one of the best ways to reduce home loan tenor. It is also an effective way to decrease your home loan interest. Selected financial institutions also allow individuals to make part-prepayment without any additional fees.
- Consider home loan refinancing
Generally, individuals opt for the balance transfer facility to get a reasonable home loan interest rate. However, it also allows them to shorten the loan tenor. Existing borrowers can transfer the outstanding loan balance to a new lender, and they can choose a short tenor to repay the due amount. Since the interest rate is lower with a new lender, the EMI would not increase that much compared to EMIs with the previous interest rates.
To leverage more benefits, it is important to know when should you do a home loan balance transfer. Note that existing borrowers can opt for home loan refinancing only after a certain period has passed from availing the loan.
Existing borrowers can also avail pre-approved offers that make loan processing quick and straightforward. Besides home loans, such offers are also available on various credit products like loans against property. Enter your name and mobile number to check your pre-approved offer.
Besides reducing the tenor of a home loan in India, new borrowers can also reduce interest burden by following some simple tips –
- Meet lender-specific eligibility criteria to avail competitive interest rates and reduce borrowing cost.
- Opt for a higher down payment and reduce the loan amount applied for.
- Compare different lenders before applying with one.
- Choose a shorter tenor.
- Select the right interest type.
However, besides interest, both new and existing borrowers can save further on income tax payable when they service a home loan. It allows them to save up to Rs.1.5 lakh on principal payment under Section 80C of the ITA. Moreover, they can also avail tax benefits of up to Rs.2 lakh on interest payment.
It is always advisable to shorten the home loan tenor if you maintain an adequate cash flow. It results in a lower borrowing cost and improves credit score due to faster repayment without fail.