This is the time one should consider switching his home loan to a PSU bank to avail of the benefits of lower home loan rate.
Home loan rates have fallen to as low as 6.7% as public sector banks have mostly passed on the repo rate cut announced by the Reserve Bank of India over the last four months. PSU banks including the State Bank of India are now charging between 6.7-7% interest rate on new home loans. Those who have repo-linked home loans from these banks have started getting lower interest rates from this month. But those having home loan from other banks and loans linked to MCLR are still paying much higher rate on their home loan. This is the time one should consider switching his home loan to a PSU bank to avail of the benefits of lower home loan rate. Here are five tips you may follow to reduce your home loan liability.
Consider switching your home loan
If your current lender is not offering you the best rate on home loans, and you think that the total interest burden can be reduced by switching your loan to another lender, then it is worth doing that. Experts say if any other lender is offering you 50 basis points lower interest rate than your current home loan and the remaining repayment period is more than 15 years than it makes sense to switch your home loan.
If somebody has a Rs 50 lakh home loan at 7.70% interest now and the remaining tenor is 20 years, then he can reduce his EMI burden by around Rs 2,150 per month by switching his loan to another lender who offers less than 7% interest. His overall interest burden will fall by Rs 5 lakh, over the remaining 20-year tenor.
Take long tenure home loan and start a SIP
The best way to reduce your home loan liability is by taking a long tenure home loan and starting a SIP in a diversified equity fund simultaneously. This may sound absurd but you will be surprised to know the benefit when you see the calculation. For example, you want to take a Rs 25 lakh home loan at 9% interest rate for 20 years. In such a case the EMI will be Rs 22,493 and the total amount you will pay (including principal and interest) is Rs 53.98 lakh. Instead of taking a 20-year home loan if you take a 25-year home loan your EMI will fall to Rs 20,980 but the total amount that you will pay in the 25-years will increase to Rs 62.94 lakh, nearly Rs 9 lakh more.
Experts say, you should opt for the 25-years tenure loan and start a SIP of Rs 1,513, which you save on your EMI every month due to the increase in tenure, for 25 years. After 25 years, your home loan will be fully paid off and you will have around Rs 28.43 lakh in your hand, the expected maturity proceeds from the equity mutual fund based on 12% annualised return. In this scenario, you pay an additional Rs 9 lakh towards your home loan but you gain Rs 28.43 lakh from your SIP. This means on a net basis you gain around Rs 19.43 lakh. If your home loan interest rate is 7%, then the gains will be more.
Make regular part payments
Making part payments help you reduce your home loan liability faster. You can use your annual bonus, maturity proceeds from insurance policies to make part payment for your home loan. For example, for a Rs 30 lakh home loan of 20-year tenure at 9% interest, your EMI will be around Rs 27,000. Along with paying the EMI, if you pay an additional Rs 21,000 every year, your, home loan will be paid off in 18 years instead of 20 years. You will save around Rs 4.1 lakh in this case by way of savings on interest cost.
Use your home loan to refinance other loans
If you have other costly loans like personal loans, credit card loans, then you can take a top-up on your home loan to repay the personal loan and use the EMI earmarked for the personal loan to repay the home loan faster. For instance, you have a Rs 30 lakh home loan for 20 years as mentioned above and along with that, you have another personal loan of Rs 4 lakh at 12% interest rate for which you are paying around Rs 8,900 EMI. Suppose you have another 3 years of repayment left for the personal loan (principal outstanding of around Rs 3 lakh). In this case, you can take a top-up of Rs 3 lakh on your home loan and repay the personal loan and use the personal loan EMI of Rs 8,900 to repay the home loan.
Pay more than your EMI
If you can manage to pay an additional amount over your actual home loan EMI amount every month, it will help you in the long run and can drastically reduce your loan burden. In the above home loan example, if you pay an additional Rs 2,500 every month, then your home loan can be repaid in 16 years, four years before the original tenure.
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