A home loan enables one to attain one’s dreams of buying a new home. However, it is also one of the long-term financial commitments for which the borrowers need to be in a position to afford it. Home loan repayments are made in monthly installments (EMI) over the period of at least 10 to 20 years.
Financial institutions and banks offer a number of repayment options, solely to meet the needs of prospective buyers. This is largely done in order to attract more borrowers. Here are few tips to manage your home loan interest in the most effective way:
1. Increase your EMIs
In such scenarios, you can pick a higher loan amount from the bank and pay lower EMIs in the beginning. When it comes to paying off your EMIs, your income plays an important role. For this, lenders prefer to set your EMIs within 40% of what your monthly income is. Eventually, as your income increases, the repayment of loan can be accelerated proportionately. By paying higher EMI, your interest burden is reduced as the tenure of your loan gets reduced.
2. Flexible Repayment scheme
Flexible repayment scheme involves repayment through EMIs in a way that the amount decreases as the loan progresses. This is also commonly known as step-up repayment facility which means that in the initial years, the installment amount is high and eventually reduces in the subsequent years. This scheme is suitable for the ones who are closer to their retirement and feel the need to lower the repayment amount equivalent to their decreasing income.
3. Making prepayments
The intention of prepaying the loan amount is to reduce the amount of interest to be paid on monthly basis. While majority of these loans are structured in a way that the initial EMIs get deducted usually as the interest component. Any gains attained basis an increase in salary, selling of old property, stocks, shares, maturing of tax saving schemes, etc. can be used as a pre-payment amount.
4. Balloon Payment scheme
A balloon payment option can be utilised which is a larger-than-usual, one-time payment which is scheduled towards the end of loan term. Here, more than one-third of the entire loan amount is paid towards the ending installments. This scheme is suitable for the ones who have a very high financial need, as an advice, it should be avoided since the interest payable gets costlier than usual.
5. Delayed start of EMIs
There are a few banks that offer this scheme to its borrowers where the EMIs begin a little late.
This is a form of flexible payment option where the borrower can opt for a moratorium without
having the need to make any repayment for a period of about 36 to 60 months. Here, the
borrower need not pay any EMI but needs to pay only the pre-EMI interest amount. Once the
moratorium period ends, the borrower needs to start paying the EMIs at a pre-agreed rate.