Tips to Reduce Burden while Repaying the Home Loan

• Choose a lower loan tenure. A shorter tenure warrants that the loan amount is paid back within a short period, resulting in a lower cost of interest. You must realize that a higher interest payout doesn't imply a higher effective interest rate. What increases with the increase in loan tenure is only the total interest payout. With a smaller loan tenure, the principal amount is paid much quicker. 
• Decrease the interest rate payable on your loan amount to ensure a lower amount of absolute interest paid.
• Ensure that you pay off the principal amount quickly. When the principal amount to be paid is less, the interest applicable to the loan amount also goes low.
• Paying higher than the regular MEI can reduce the interest amount on your subsequent payments, thus decreasing the interest burden. You can pay 13 instead of 12 EMI every year. This is an effective way of reducing the amount of interest applicable.
• You can align the percentage of additional EMI paid with the increment in your salary. So if you're getting an increment of 10%, then it's smart to pay off an extra 5% of EMI annually. It will help you reduce the burden of interest amount significantly.
• Make sure that you have a decent knowledge of the financial market before you take up a loan. Ensure that no other financial institution can offer the same amount of loan at a more competitive interest rate. Refinancing your home loan could help in reducing the interest burden significantly.
• Always take into account the processing charges and other fees linked with the loan.
• Go with the EMI amount that you can afford. A shorter tenure results in a lower absolute interest amount paid, at the same time it will increase the tax burden for you.

How to reduce home loan interest?

Buying or building a home is a massive undertaking as it requires a lot of investment. To purchase a dream home, many people rely on home loans that provide low-interest rate from the banks or other house-financing companies. The principal amount of home loan is relatively higher than a car or personal loan. Therefore, paying a home loan through EMIs over a fixed period can be burdening for a borrower.

If the EMI on the home loan exceeds more than 50% of a person's income, then he/she won't have sufficient money left to pay for the monthly expenses. This is the reason why financial experts recommend borrowers to maintain a low debt to income ratio such that the borrower's EMI is less than 50% of his/her income.

Investing in a home ensures higher returns since the owner usually holds the property for a more extended period. In a bid to get a lesser home loan interest rate and EMI, borrowers end up opting for a more extended loan repayment period. This has a reverse interest compounding effect, and the borrower ends up paying absolute interest over a long tenure. Below listed are some tips on how to quickly repay the principal amount on the home loan:

• Make higher down payments. When the borrower makes higher down payments, the principal amount declines and the lower principal amount attracts a lesser interest in the EMI payments.
• The borrower should pre-pay the loan amount, if possible. Prepayment of the loan amount would reduce the principal amount. Thus the interest paid each month also declines. Usually, for such arrangements, the banks charge a fee.
• You can increase the amount of interest paid, with the increase in your net income. This helps in reducing the principal amount, ultimately reducing the amount of interest paid. If the borrower receives a bonus from their employer, then they can use it to pay off the principal amount so that the aggregate interest payable also decreases.
• The borrower can also switch to MCLR and save. Home loans received after April 2016 follow the MCLR rates where the borrower can profit from the change in interest rates. If a borrower wishes to switch to MCLR and they had taken the loan before April 2016, they will be required to pay the taxes and conversion fee. The conversion fee is considered to be a percentage of the loan amount that is due. One must perform the cost-benefit analysis to check if it'll be beneficial to switch to MCLR.

Will home loan refinancing help reduce interest burden?

You'll be required to pay a lower EMI if the home loan interest rate is low. Borrowers generally refinance the home loans to reduce the interest rate on loan. Refinancing can be complicated since it includes the prepayment fee and service charges which are levied by the lender, which gets added to the cost of the home loan. Hence the borrower trying to refinance their home loans must go through the terms wholly and then decide to refinance the loan.