Ways of Saving Money on a Home Loan
Purchasing a house with a home loan is one of the biggest financial commitments an individual makes during their lifetime. Usually, a home loan tenure ranges from five to thirty years. The longer the tenure, the higher the interest amount an individual pays.
In this article, we will discuss some of the ways in which an individual can save money on a home loan.
1) Compare Home Loans
Before finalising the financial institution, compare the home loans of various banks and NBFCs. Apart from the interest rate, compare other features like charges, repayment options, etc. You can choose an aggregator website/app to compare the features of home loans from various financial institutions. Once you shortlist a couple of financial institutions, negotiate with them on the interest rate and other benefits they can offer. Choose the one that suits your needs the best.
2) Work on Improving Your Credit Score
Some financial institutions provide loans at lower interest rates to individuals with a higher credit score. So, work on improving your credit score before applying for a home loan. You can improve your credit score by paying existing loan EMIs/credit card outstanding before or on time, maintaining a lower credit utilisation ratio, having a healthy mix of secured and unsecured loans, ageing of credit products, not making too many credit applications within a short period, etc.
Based on a good credit score, even if the financial institution offers you a home loan at a 0.25% lower interest rate, it can make a substantial difference in the interest amount paid over the loan tenure.
3) Choose a Shorter Tenure
Some individuals usually go for the highest tenure (20 years or above) the bank offers. You should evaluate your free cashflows and accordingly arrive at an EMI that you can pay comfortably. Basis the EMI payable, choose the tenure. Accordingly, if it is possible to choose a shorter tenure than the maximum tenure the bank offers, then go for the shorter tenure.
With a shorter tenure, your home loan will get over faster. If your home loan gets over faster, you will save interest compared to a long tenure.
4) Increase EMI as Your Income Rises
Every individual expects their annual income to increase. Accordingly, as your income increases, you can increase your EMI every year. Even if you increase your EMI by 5 or 10% every year, you will be able to finish your home loan earlier than scheduled. The earlier you finish your home loan; the higher will be your interest savings.
Apart from increasing the EMI, you can make lumpsum prepayments from time to time as and when you have surplus funds. For example, you can use your entire or a part of the annual bonus, maturity proceeds from an investment, etc., to make a prepayment.
5) Make a Larger Down Payment
Banks usually require a home loan borrower to make a down payment of 20% of the property purchase price. If possible, make a larger down payment than 20%. The higher your down payment, the lower will be the home loan amount you will have to opt for. With a lower home loan amount, your tenure will be lower. It will help you repay the loan faster and save on the interest amount.
6) Buy a Separate Term Insurance Instead of Home Loan Insurance
The bank/NBFC will ask you to buy home loan insurance when taking a home loan. While it is important to buy home loan insurance, it is not compulsory. Do you have adequate life insurance that can cover the home loan outstanding and other financial goals in the event of your death? If yes, then you need not purchase home loan insurance. If not, you may buy additional term insurance to cover your home loan outstanding in the event of your death.
If you purchase home loan insurance, in some cases, it may not be transferable when the home loan is transferred from one financial institution to another. However, when you have an individual term insurance cover, even if you transfer your home loan, it can still be used to make a claim and pay the outstanding home loan amount in the event of the borrower’s death.
7) Take a Joint Loan With the Spouse to Maximise Tax Benefits
When you take a joint home loan with your spouse, both of you can claim the tax deductions. Both of you can avail of a deduction on the principal repayment under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the principal amount repaid or Rs. 1,50,000, whichever is lower. Please note that Section 80C provides a deduction for other financial products along with home loan principal repayment. Both spouses together can avail of a maximum deduction of Rs. 3,00,000.
Both spouses can avail of a deduction on the interest payment under Section 24 of the Income Tax Act. The maximum deduction allowed in a financial year is the interest amount paid or Rs. 2,00,000, whichever is lower. Both spouses together can avail of a maximum deduction of Rs. 4,00,000.
Thus, with a joint home loan, both spouses can avail of deductions on the principal repayment and interest payment and save money on taxes.
8) Have an Early Home Loan Repayment Goal
While doing your financial planning, ask your financial advisor to include early home loan repayment as one of your financial goals, along with others. During regular reviews, once every six to twelve months, you can discuss the progress of the home loan repayment along with other financial goals.
You can work on options like a 5% or 10% increase in annual EMI, paying an additional EMI every year, making prepayments of Rs. 50,000 to Rs. 1,00,000 every year, or some combination of these options. Working with a financial advisor on these options will help you finish the home loan earlier than scheduled without straining your cash flows.
Finishing the Home Loan Early Can Speed up Your Financial Freedom Journey
A home loan is one of the biggest financial liabilities an individual takes up in their lifetime. Hence, you should make efforts to repay the home loan at the earliest to become free from the liability. Also, when you finish the home loan earlier than scheduled, along with saving interest, you free up the EMI amount that can be invested towards other financial goals like retirement planning.
After home loan repayment, once you start directing the additional cash flows towards other financial goals, you can achieve the other financial goals faster than scheduled. Once you achieve all your financial goals, you will gain financial freedom and the much-needed peace of mind.
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