Home Loan: While home loans are valuable for purchasing a house, they can also become burdensome. Many individuals aspire to pay off their home loans quickly, especially as home loan rates exceed 9 percent, surpassing the returns from many safe debt investments. Let’s dive to a straightforward method to significantly reduce a 25-year home loan to just 10 years without straining your finances. There are various ways to make prepayments on your home loan, but we will focus on the simplest approaches to achieve the goal of clearing a 25-year loan within a decade.
Having a home loan
Let’s consider a scenario: you’ve secured a home loan of Rs 50 lakh at an 8.5 percent interest rate with a 25-year tenure. This makes up to a monthly EMI of Rs 40,261. If you adhere to this payment schedule without making any prepayments, your loan will be fully settled in 25 years (assuming a consistent interest rate for simplicity in this example). However, during this period, you will also end up paying a substantial interest amount of around Rs 70-71 lakh, on top of repaying the initial Rs 50 lakh principal. This hefty interest burden is what motivates most individuals to consider prepayment. Now, let’s delve into the two components of the prepayment strategy.
Strategy 1: Paying one extra EMI every year
The first part of this strategy involves making an additional EMI payment each year, equivalent to one month’s regular EMI. In our example, instead of paying 12 monthly EMIs of Rs 40,261 annually, you make 13 EMI payments. How does this benefit you? Implementing this approach alone reduces your loan tenure from 25 years to approximately 19-20 years. You effectively cut down more than 5 years from the original repayment schedule. Additionally, you save over Rs 18 lakh in interest costs.
It’s a relatively straightforward strategy, especially considering that you may receive annual bonuses or incentives. You can allocate a portion of this surplus towards making at least one extra EMI payment per year. Save 3-3.5k every month and pay up on the year end.
Strategy 2: Increase EMI percentage
The second part of this strategy involves gradually raising your monthly EMI by 7-10 percent each year. Given that your income or salary typically experiences annual increments, it’s entirely feasible to adjust your EMIs accordingly, even if your bank doesn’t prompt you to do so. For instance, if you initiated your home loan with a monthly EMI of Rs 40,261 in the first year, a mere 5 percent increase in your EMI each year would result in the loan being paid off in about 14 years instead of 25. Furthermore, if you opt for a 7.5 percent annual increment in EMIs, your loan tenure could shrink to approximately 12 years.
Combining both the strategies
When you combine the strategies of paying one extra EMI each year and increasing your EMIs by 7.5 percent annually, the outcome is remarkable. Your 25-year home loan can be fully paid off in just a little over 10 years, precisely achieving the initial goal set forth.
Here’s a valuable tip: Some years may bring substantial income increases (like a job switch), while others may not be as lucrative. If possible, consider adjusting your EMI to align with your income growth each year. A modest effort on your part can significantly expedite the process of clearing your home loan.
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