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Being released from home loan payments before the scheduled end gives you more space to focus on your priorities. The large volume of mortgage lending that is likely to occur given rising home prices keeps the PMI relatively high, leading you to pay the lender a large amount of interest. For example, a home loan of INR 50,000 for 20 years at an interest rate of 8% per year will generate total interest payments of INR 50,37,281 (approximately), which is more than the principal amount of the loan.
But if you plan well, you can pay off the loan much sooner and lower your interest payments. You may be wondering how I can plan and if there are any implementation challenges.
So we'll first discuss the benefits of early home loan payments and then focus on how you should proceed. Finally, we will look at the possible challenges. This way you could better understand things and make the right decision. Let's keep reading!
Benefits of early repayment of the mortgage loan
pay amortgage loanahead of time is called prepaid in financial terminology. We mentioned earlier that this will help reduce your interest obligations. But its usefulness is more than what you can see below.
Interest obligations can be drastically reduced
Because home loans last a long time, usually in the range of 15 to 20 years on average, you could end up paying a large amount of interest to the lender. And if youMortgage loan interest ratehigher than the average market rate, the total interest payment may be beyond your imagination. But a prepayment helps shorten the term of a home loan and lowers interest payments. An example below will help you understand it better.
Example -He recently obtained a home loan of INR 60,000 at an interest rate of 8.20% per annum. The loan is taken for 20 years. But how much do you save by paying upfront after 14 years?
|aspects of the loan||Import (INR)|
|EMI payable at 8.20%||50.936|
|Interest payable @ 8.20%||62,24,591|
|Interest payable up to 14 years||54,46,195|
|Outstanding balance after 14 years||28,88,981|
|Savings when paying off the outstanding balance||7,78,396 (62,24,591-54,46,195)|
You can see significant savings of INR 7,78,396 by prepaying the loan after 14 years.
It gives you the freedom to think about other things.
When the loan ends, you get the space to create more corpus for your retirement days. We often live in the present and do not worry about securing our future. And since a home loan is allowed to continue to its scheduled completion, you may not have enough time to build the retirement corpus you want. In this context, it is advisable to repay the loan ahead of schedule with smart planning. Retirement will most likely eliminate active income. And if you don't have the right corpus, you may have trouble living peacefully after retirement.
The margin to obtain more credit is also improved.
Because a large home loan matures sooner than expected, you can afford small loans as well. With a home loan, the scope of a personal loan or car loan is reduced a bit. Lenders offer higher loan amounts if you have fewer or no outstanding debt obligations.
But how can you schedule a home loan prepayment?
As we have already said, a successadvance payment of mortgage loanit requires smart planning and execution. Here money is diligently saved and used sensibly. In addition to making the most of your savings, there are other ways to get rid of a home loan faster. Let's focus on these.
Diligently save money and choose the right source to succeed
If you got a home loan where the Equivalent Monthly Rate (EMI) is well below 50% of your Net Monthly Income (NMI), you may save more compared to someone whose loan obligations are much higher. But to reach the desired amount over time, the savings must also be invested in the appropriate financial product, as we have said before. Before deciding on the product, you must be clear about two things: risk tolerance and investment horizon, as well as your objective of investing for the early payment of the mortgage loan. You are a good judge of yourself. See how you react to currency fluctuations and how long you can stay invested.
If you are more risk tolerant and can invest for the long term, you can invest your money in equity funds through a Systematic Investment Plan (SIP). If you have a low tolerance for risk, try splitting your investments between fixed deposits and debt funds. Since this is a prepayment on a home loan, you need peace of mind with money growing. Therefore, even if you are aware of the risk, try to invest a reasonably sizeable amount in safer instruments. Well, you can't give an ideal task. But if you invest 40% in fixed income and debt funds and the rest in stock funds, you can do well.
Use home loan and investment calculators to determine the correct investment amount
Use the Home Loan EMI Calculatorto check how amortization will evolve over the years. With a glance at the calculator, you can calculate the moment when you have accumulated the desired sum for the advance payment. This will help you choose the right amount to invest, which is just as important as choosing the right type of investment.
So pull out all your investing calculators (mutual funds and time deposits) and see how much you need to invest each month to reach your home loan prepayment amount. You can use calculators for mutual funds and fixed deposits. Equity and debt fund returns are not fixed compared to fixed deposits that guarantee investors a fixed income. But market trends suggest you can earn returns of around 12% and 8% on investments in stocks and debt funds, respectively.
For example, if you need INR 20 lakh for 10 years, a SIP investment of INR 10,000 in equity funds will suffice as long as the investment grows at an annual rate of 12%. Since there can be fluctuations in the terminal value, you should also invest in debt funds and time deposits.
What if we told you to change your approach to prepaid home loans?
Yes, you can take different approaches to prepaying home loans. One charges the large sum to pay off the loan in full before its original term. The second is to make a partial payment in advance. Yes, lenders allow full and partial prepayment of a mortgage loan. You can pay a certain part of the outstanding amount and continue with the same EMI after that. What happens then is a reduction in tenure as well as interest payments? Let's consider an example to better understand the operational methodology.
Example -He has obtained a home loan of INR 50 lakh at 8% for 15 years. Given your current income, you could pay a partial payment of INR 7,000 after 8 years of loan repayment. If you do the same and continue to pay the same EMI thereafter, how quickly can you get rid of credit obligations? Let's find out!
|Mortgage Loan Details||Import (INR)|
|EMI payable at 8%||47.783|
|Interest payable @8%||36,00,869|
|Interest payment up to 8 years||26,52,826|
|Outstanding balance after 8 years||30,65,696|
|Outstanding balance after a partial payment||23,65,696|
|Interest to pay for keeping the same EMI after partial payment||5,12,369|
|Interest to pay before partial payment + Interest to pay after partial payment||31,65,195|
By keeping the same EMI after making a partial payment, you shorten the life of the loan by 2 years. The loan has a total duration of 13 years (8 years before partial payment and 5 years after). This will give you savings worth INR 4,35,674 which you should see above.
Challenges you may face when you want to pay off a home loan ahead of schedule
Paying off a home loan ahead of schedule may not be as easy as many think. Yes, you may face challenges like lower than expected income growth over the years, persistent unemployment, etc. Let's talk about this now.
Lack of desired revenue growth
Revenue growth may not be the same everywhere. You may experience some dull moments where your income doesn't grow incrementally. The reasons for this can be varied. Either your business isn't doing well, or your employer doesn't think your performance is good enough to justify an increase in your salary. Even if you move to another job, you may not get the raise you expected, derailing your home loan prepayment plans.
Just as there is no guarantee that you will have good income growth over the years, there is also no guarantee that you will not have interruptions in your work life. Yes, he may lose a job for an extended period of time, possibly even having difficulty repaying the EMI home loan. In this case, you must postpone or cancel your prepaid plan.
increase in expenses
The thing about spending is that it only increases over time. You may feel the need to save more for your children's education. Education costs are rising faster. If a 4-year engineering course in India costs INR 15,000, try to accumulate taking into account 5% annual inflation. Since the EMI home loan is likely to eat up a large part of your income, you may have a hard time accumulating enough educational corpus. In this case, you can request a partial prepayment and leave enough for your children's education.
As we have seen, the benefits of paying off a home loan early in terms of savings are enormous. But all that depends on how your income and savings evolve over the years. If you are not experiencing problems, prepaying a home loan is a formality for you. However, if the slump lasts longer and your investment does not generate the desired growth, a full upfront payment may be ruled out. In this case, you can still choose to pay in installments and reduce your interest payments.
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