Synopsis: When taking a home loan, you can reduce borrowing costs by keeping the loan tenure as short as possible, increasing your EMI as your income rises, opting for separate term insurance instead of lender-sold insurance, understanding the loan's benchmark rate and choosing one with quick rate changes, and considering a joint home loan with your spouse to maximize tax benefits and potentially lower stamp duty. Implementing these strategies can help you manage your home loan more effectively and save money.
The longer the loan tenure, the higher the interest burden.
Home loan rates will remain steady as the RBI has kept policy rates unchanged.
If you're planning to buy a house with a loan, here are some tips that might help you to reduce your borrowing costs.
1. Keep loan tenure as short as possible: Longer loan tenures result in higher interest payments. For example, a Rs. 50 lakh loan at 9% over 10 years incurs Rs. 26 lakh in interest.
Extending the tenure to 15 years raises interest to Rs. 41 lakh, and a 20-year loan results in Rs. 58 lakh in interest.
In the first year of a 20-year loan, most of the Rs. 5.4 lakh payment goes towards interest, with only Rs. 93,000 reducing the principal.
Therefore, aim to keep the loan tenure as short as possible.
2. Increase EMI when income rises: Short loan tenures mean higher EMIs, which can be difficult for young buyers.
If a longer tenure of 15-20 years is necessary, consider gradually increasing the EMI amount.
Raising the EMI by 5% annually can shorten a 20-year loan by nearly eight years.
Increasing the EMI by 10% annually can finish the loan in 10 years.
Prepayment is easier if income rises by 8-10% annually, making a 5% EMI hike manageable.
Early prepayments have a significant impact, so increase EMI as soon as possible and use any extra cash for prepayments.
3. Check if the lender has sold insurance: Life insurance is crucial for large loans to protect dependents in case of an untimely death.
However, the life insurance sold with home loans is usually linked to the loan and decreases with each EMI paid.
If the borrower dies during the loan term, the insurance company pays the outstanding loan to the lender.
This insurance may not be transferable if the loan is refinanced.
It's better to buy separate term insurance that continues even if the loan is prepaid or the lender is changed.
4. Understand the link between benchmark and loan rate: Most home loans are floating rate loans linked to an external benchmark, often the RBI repo rate, which has been steady at 6.5% since June 2023.
Lenders set the reset period, which can be quarterly, half-yearly, or annually.
Determine the reset periodicity before taking a loan and choose one with quicker transmission of benchmark rate changes.
5. Consider a joint home loan with your spouse: The government offers tax benefits on home loans to encourage home purchases.
Under Section 24b, up to Rs. 2 lakh of home loan interest can be deducted.
With rising home prices, many loans exceed Rs. 75 lakh.
At a 9% rate, a Rs. 50 lakh loan for 20 years incurs about Rs. 4.5 lakh in annual interest.
A working spouse allows for a combined Rs. 4 lakh deduction if both claim Rs. 2 lakh individually on a joint home loan.
Additionally, some states offer lower stamp duty for properties registered in a woman's name. For instance, in Delhi, the stamp duty is 6% for male buyers and 4% for female buyers.
In conclusion, managing the cost of a home loan effectively requires strategic planning and informed decisions.
By keeping the loan tenure as short as possible, increasing EMIs as income rises, avoiding unnecessary insurance sold by lenders, understanding the link between the benchmark rate and your loan, and considering a joint home loan with your spouse, you can significantly reduce your borrowing costs and save money.
Implementing these strategies will not only ease your financial burden but also help you achieve homeownership more efficiently.
