Banks are cutting home loan rates. SBI MCLR has been cut for the 6th time this year to 8.05% a year. This is SBI’s 6th consecutive MCLR cut in FY 2019-20. SBI also offers repo-rate linked home loan. SBI has a spread of 265 basis points over RBI repo rate of 5.15% to calculate external benchmark lending rate. SBI charges a premium for effective home loan rate. SBI has brought back processing fees on home loans.
In all this comes the question. Why close home loan early? Though home loan rates are reducing, home loan interest can eat up earnings. This is why you must close home loan early.
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A longer home loan tenure means lower EMIs. You can repay home loans easily without stressing finances. But, a longer tenure increases cost of home loan. You end up paying interest for a longer duration.
Pick home loan tenure keeping in mind age, income and repayment capacity. Decide on shortest home loan tenure where you pay home loan EMIs easily, and you don’t have to compromise on life goals.
How do you decide on home loan EMIs? Use IndianMoney home loan calculator. Just fill in the home loan amount, home loan interest and loan period to calculate home loan EMIs.
You might be getting a salary hike each year. Increase home loan EMIs so that loan tenure reduces. This helps save on home loan interest as outstanding amount reduces. Whatever extra you repay over and above the set EMI serves as prepayment. This lowers home loan tenure fast.
Let’s understand how this works. Let’s say you avail a home loan of Rs 50 Lakhs at 8.5% for tenure of 20 years. Your home loan EMI is Rs 43,391. A 10% home loan EMI increase; ends home loan in 9 years and 6 months.
See Also: How to Select the Best Home Loan?
Prepaying home loan reduces outstanding home loan amount. This reduces total interest payout and subsequently home loan tenure. Banks don’t charge prepayment penalty on floating rate home loans as per RBI regulations. Make part prepayments to reduce outstanding home loan principal payments. This saves home loan interest over the loan tenure.
Let’s say you want to prepay Rs 2,40,000 within a year. You must save Rs 20,000 a month to collect the home loan prepayment amount. If you prepay and continue paying the same home loan EMIs after prepayment, the home loan finishes before the tenure ends. This saves a lot in home loan interest.
Opt for home loan balance transfer if other banks are offering lower home loan interest rates. You can try home loan balance transfer if other banks have better home loan products or your top up home loan is denied. A home loan balance transfer doesn’t lead to much savings if you opt for a higher tenure. Try to keep the new tenure same as the remaining tenure of the existing home loan. This saves you from extra interest payments.
Before home loan balance transfer, compare the savings vis-a-vis processing fees and charges. Don’t opt for home loan balance transfer, if remaining tenure is less. Go for it only if there are significant savings in home loan interest.
Postpone that vacation or trip abroad, to save money and make a home loan prepayment. Many people swipe credit cards for air tickets and other expenses on international travel. Credit cards charge high interest rates and high transaction charges are involved if swiped abroad.
Avoid personal loans when you are servicing the home loan. These charge high interest rates. If you are in urgent need of cash, borrow from friends and family instead of availing a personal loan. Personal loans charge interest of 14-22% a year. You could struggle with repayments.
See Also: What Is Home Loan?
Use fixed deposits to make pre-payment of home loan. Most FDs offer 6.25-6.75% interest a year. Home loan interest rates are higher. It makes sense liquidating FDs and using the amount to pre pay home loan.
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