Today in this article, I will discuss how to reduce housing loan interest? Most of us have taken a housing loan for our dream home. Perhaps, it is the biggest monthly expense for most of us. Right? So how about I tell you the ways to reduce the home loan interest burden?
Housing loan EMI typically comprises 35% to 40% of the salary of individuals. This is one of the biggest burdens on the individual how is earning for the full month and around 40% of the money is eaten by banks from where the home loan is taken.
Most of the salaried people after paying such high EMI for a home loan hardly left with any money to invest for other financial goals.
How to Reduce Housing Loan Interest?
Let’s understand the ways of reducing the housing loan interest burden with an example.
Consider the housing loan amount: 30 Lakhs.
Interest Rate: 8.5% per annum.
With the above-mentioned details of the housing loan, let’s calculate the actual outflow of the money for different housing loan tenure.
Tenure EMI Amount Total Interest Paid Interest % over Principal 10 37196 1463485 48.78% 15 29542 2317594 77.25% 20 26035 3248327 108.27% 25 24157 4247044 141.56% 30 23067 5304266 176.80%
So as you can see the 30 lakhs loan taken for 10 years, you have to pay ₹. 14.63 lakhs as interest amount. That is 48.78% of your housing loan amount.
Same way If you take the same 30 lakhs loan for 15 years the total interest payment will be 23.17 lakhs i.e. 77.25% of the loan amount.
The same calculation for 20 years, 25 years and 30 years go beyond 100% of your loan amount. So in those cases, you will have to pay interest higher than your capital (home loan) amount.
Year Principal Interest Total Payment Balance % of Interest 2020 59707 252709 312416 2940293 81% 2021 64948 247468 312416 2875345 79% 2022 70728 241688 312416 2804617 77% 2023 76980 235436 312416 2727637 75% 2024 83785 228631 312416 2643852 73% 2025 91190 221226 312416 2552662 71% 2026 99251 213165 312416 2453411 68% 2027 108024 204392 312416 2345387 65% 2028 117572 194844 312416 2227815 62% 2029 127964 184452 312416 2099851 59%
As you can see in the above table, your principal amount vs interest amount, the interest amount is as high as 81% in the first year.
For the entire first ten years of your housing loan tenure, you can see that the total amount you have paid as EMI is around 31.24 lakhs, but against that, your outstanding loan stands at 21 lakhs.
So we can say that in the first ten years, only 10 lakhs have been paid as principal amount i.e. 30% of the housing loan of 30 lakhs.
So how to reduce the home loan interest burden?
Here are a few tips by which you can reduce your home loan interest burden.
Pay at least 1 additional EMI per year.
Let’s assume that you have taken a loan for 20 years of tenure. So paying 1 additional EMI every year will reduce your EMIs by 20 numbers. Now that’s almost more than one and half years of your tenure.
Paying one additional EMI will not hurt your monthly budget. You can save a small amount every month and accumulate it for all the twelve months. At the end of the year, you can pay additional EMI with this amount.
Increase EMI amount by 3% to 7% every year
If you are a salaried person, you must be getting a yearly increment. This increment would be in the range of 8% to 10% per year. So with the increasing monthly cash flow, you can easily pay extra amount for your EMI.
I would suggest you increase your EMI amount by at least 3% to 7% every year. This way you will be able to paid up your housing loan quickly.
Use a combination of both of the above
If you really want to get rid of the home loan burden, you should use both of the above options together. With the increase in the cash flow, if you have the discipline of saving money, you can easily pay one extra EMI per year and increase your home loan EMI by 3% to 7% per year.
This small trick can help you save lot of interest on your housing loan.
Refinance your loan at a lower interest rate
There are banks or NBFCs which are providing cheaper housing loan. Keep your eyes open and find for the best and lowest interest rates. Switch your home loan to the best service provider.
Usually, the government banks are providing lower interest rates as compared to the private sector banks. This is my personal experience. I have taken a housing loan from Bank of Baroda which provides me the interest rates always lower by 0.50% to 1% as compared to the banks like ICICI or HDFC.
How much you can save?
Well here is the comparison for our example of 30 lakhs loan for 20 years of tenure.
Loan Amount 3000000 3000000 3000000 3000000 Pre Payment 0 50000 100000 300000* Tenure after Pre Payment 20 Years 15 Years 12.3 Years 16.7 Years Total Payment 6248327 5369265 4917916 5456543 Savings – 879062 1330411 791784 Tenure Reduction – 5 Years 7 yrs 9 months 3 yrs 5 months
* 300000 - One time pre payment after 3 years of tenure
So as you can see in the table above, I have calculated 3 different scenarios where the person is doing the prepayment of 50000, 100000 and 300000 respectively.
In the first scenario where there is no prepayment is done so there is no savings and reduction in tenure is seen. For the 2nd scenario, if a person is making ₹ 50000 as a prepayment, you can see the money saved is ₹ 8.79 lakhs and tenure is reduced by 5 years.
While in the 3rd scenario, if the person is making ₹ 100000 as a prepayment every year, the amount saved is ₹ 13.30 lakhs and home loan tenure is reduced by 7 years and 9 months. Isn’t that huge?
In the last scenario, I have considered that the person is making only a one-time prepayment of ₹ 3 lakhs after 3 years of home loan. The amount saved is ₹. 7.91 lakhs and tenure reductions are 3 years and 5 months.
Doing this for yourself and for the peace of mind is not that hard. I have written a detailed article on How to save money? refer to that if you want ideas for saving money.
So while taking the housing loan, you must check all these aspects before finalizing your tenure and your capacity of prepayment in the future.
In India, almost 78% of the housing loans are being paid up prematurely. So you can imagine the person taking home for 20 years and paying higher interest every month, finally paid up his loan in let’s say 15 years.
So when you can pay up your loan in 15 years, why should you opt for 20 years of tenure and pay more interest?
Hope this helps. Please share your views in the comment box below.