Reducing the home loan tenure helps you in saving your interest outgo and helps you achieve financial freedom faster. But how can you do this?
Many consider increasing EMI as a solution. While it can help you reduce your loan tenure, it isn’t the best option. Why? If you face a cash crunch in future, it’s difficult to reduce it again. Most lenders may not readily agree.
There’s a better option: PREPAY.
You are free to do it whenever you have surplus money. And when you prepay an amount, your outstanding principal comes down by that much. As the principal loan amount reduces, so does the interest you have to pay.
Check an example ?
Suppose you took a loan of Rs 50 lakh @8.5% for 20 years. After 3 years, your outstanding principal amount would be nearly Rs 46.7 lakh. Say you received a bonus & prepaid Rs 2 lakh.
Your outstanding principal balance would come down to Rs 44.7 lakh. The more you prepay, the lower your tenure & interest payout.
Check the image below to see how a 20-year loan could be reduced to 11 years if you prepay aggressively. This also helps you save a considerable amount you would have paid the lender as interest.
There are a few more options you can explore.
One, you can request your lender (especially NBFCs) to shift your existing home loan rate to what they offer to new borrowers, usually lower.
Lenders may take a small fee & shift your loan to a lower rate.
What if your lender doesn’t allow migrating to a lower rate?
In that case, you can switch to another lender offering better terms. In industry parlance, it’s called ‘balance transfer’. This can save you money by reducing your interest rates.
If you cannot do any of these, don’t panic. After all, 15-20 years is a long duration. If the interest rate cycle reverses, interest rates will go down again.