How can you reduce your home loan tenure by 7 years?

Dreaming of owning a home? It’s not just a big step—it’s a monumental milestone that comes with incredible rewards and responsibilities. But before you take the plunge, let’s talk about the financial aspect of things.

In this comprehensive guide, we’ll dissect the numbers, crunch the figures, and lay out everything you need to know to make informed decisions. Finalising the property is just the first step, but it is the loan process and payment that often seems daunting as it is a matter for several years to come once you move in your new house.

Setting Your Budget

The 28/36 Rule

One of the foundational principles of home buying is the 28/36 rule, which suggests allocating no more than 28% of your gross monthly income to monthly EMI and no more than 36% to total debt. This rule helps ensure that you don’t overextend yourself financially. Total debt includes home loan EMIs plus any other debts such as car loans, student loans, and credit card payments.

Multiply your monthly income by 0.28 to find your ideal repayment capacity on your home loan and by 0.36 to find your ideal total debt.

For example, if your gross monthly income is Rs 1,00,000:

• Maximum housing cost = Rs 1,00,000 x 0.28 = Rs 28,000
• Maximum total debt = Rs 1,00,000 x 0.36 = Rs 36,000

Also Read: ITR Filing: Top 10 benefits of filing income tax return on time even when not compulsory

Understanding Housing Loan Options

Fixed-Rate vs. Adjustable-Rate Home Loans

• Fixed-Rate Home Loan: The interest rate remains constant throughout the loan term, offering predictable monthly payments. Best if you value payment stability and plan to stay in your home for a long time.
• Floating Home Loan Interest Rate: The interest rate can fluctuate based on a benchmark index, which may lead to higher or lower payments in the future. This is more recommended as it offers more flexibility. Interest rates usually fluctuate in a 5 year cycle. It is suitable for those who expect to move or refinance in a few years and can handle potential increases in monthly payments. But one must keep a keen eye on the changes. 

Factoring in Closing Costs

Closing costs are the fees and expenses incurred when finalising a home purchase. They are typically around 6-8% of the purchase price and include:

• Stamp Duty and Registration Charges: These are mandatory fees levied by the state government on property transactions. The stamp duty is calculated as a percentage of the property’s value, and registration charges are the fees for registering the property in the buyer’s name.

Here’s how you can reduce your home loan tenure: Sample Calculation

Consider buying a house for Rs 1 crore with a 9% annual interest rate over 20 years. Let’s take the standard that you pay 20 lakhs in down payment and take a loan for 80 lakhs. The total amount paid over the loan term would be Rs 192,74,738, which includes Rs 92,74,738 as interest—almost as much as the cost of the house itself. This example highlights the importance of understanding interest rates and loan terms.

Extra EMIs on Loan Tenure

Every quarter, try to allocate one extra EMI to your loan repayment plan. Setting up scheduled extra payments, such as quarterly or bi-annual additional EMIs, ensures you consistently reduce the principal, making steady progress towards paying off your loan early. Since interest is calculated on the remaining principal, reducing the principal early lowers the interest you pay over time.

Here’s how it impacts your loan tenure:

Topping up your EMI

By topping up your EMI by 10 percent, you can reduce your loan tenure by 4 years. And you can save 22,48,950 in interest. By topping up your EMI by 20% you can reduce your loan tenure by 7 years and interest by 35,61366. 

It is always a good idea to top up your EMI by 10-20%. 

It does not make economic sense to pay over 92 lakh as interest for a 1 crore house. And if that were the case, buying a house would not be considered judicious. 

To effectively reduce your housing costs through your home loan, employing various methods to pay extra EMIs can be transformative. Utilising annual bonuses or windfalls, such as tax refunds or end-of-year bonuses, offers an excellent opportunity to make additional EMI payments without impacting your regular budget. 

Together, these methods not only accelerate the repayment of your home loan but also significantly reduce the overall interest paid, making your dream home more affordable and bringing you closer to financial freedom faster.

Conclusion

Buying a home requires meticulous financial planning and a thorough understanding of various costs and options. Key steps include setting a realistic budget, exploring housing loan options, saving for a down payment, and accounting for closing costs. Balancing the financial aspects with the emotional significance of homeownership is essential. Ensure your decision aligns with both your personal and financial goals. Seek advice from financial professionals and utilise available resources to make the best choice for your future.

In conclusion, taking on a home loan can significantly impact your lifestyle, influencing your financial flexibility and daily expenditures. By following the tips mentioned—setting a realistic budget, exploring housing loan options, saving for a down payment, and accounting for closing costs—you can ensure that homeownership doesn’t compromise your lifestyle choices. Thoughtful financial planning and leveraging professional advice enable you to enjoy the benefits of owning a home while maintaining a comfortable and balanced lifestyle.

(By Akhil Gupta, Co-founder and CPTO of NoBroker.com)

Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.