Hyderabad: As interest rates are increasing repeatedly these days, home loans have become burdensome. The repo rate has once again increased by a quarter percent. Hence, increase in loan tenure or monthly instalments became a big concern for borrowers. What should be done to pay off this debt quickly. Follow these steps to take increased debt burden off your back.
Repo impact
After the recent increase, the repo rate went up from 4.0 percent in May last year to 6.50 percent, an increase of 2.5 percent. So the repo based home loan you took at 6.5 percent last year has now reached 9.0 percent. If calculated with increased interest, your home loan taken for a period of 20 years may last beyond 30 years. Your EMIs may also increase. Hence, advance payment can be made to reduce such increased debt burden.
Increase EMI
As your annual income increases, try to increase your home loan instalment amount by 5-10 percent every year. This will reduce your loan tenure by a few years. The EMI hike can be said to be a way to counter rising interest rates. Generally, at least one EMI is required to pay off the loan principal in part. For example, suppose your EMI is Rs 50,000. Then the minimum payment will be the same amount.
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Some lenders may ask for double the amount of EMI. That means partial payment of Rs 1,00,000. This payment may not always be possible. So, if you increase the EMI, it starts working as an advance payment every month. For example, your EMI is Rs 25,000. If you pay Rs 30,000, the loan will be settled quickly. As a result, the interest burden can be significantly reduced.
Principal amount
Those who find it difficult to increase instalments can try to pay 5 percent of the loan principal every year. By doing this, a 20-year loan can be repaid in 12 years. Depending on your financial situation, you can pay more than this. Then 66 percent of the loan amount can be settled through EMIs and the rest through prepayment. Instead of 5 percent of the loan taken, paying 5 percent of the remaining principal will reduce future burden. This will enable you to save more for future financial goals.
Prepayments
Home loan interest is low compared to other loans. So, there is no rush in solving this. Everything should be done according to a strategy. If tax deductions are taken into account, the net interest will be up to 7 percent. Long term investment in the market can earn up to 10 percent returns. Prepayments can help reduce the initial interest burden on your loan when repo rates rise. The need for prepayments decreases as the tenure progresses. Then you can invest in schemes that offer higher returns. In this way, the debt can be paid off quickly and wealth can also be created.
Reduce tenure
The main thing to keep in mind is how many years you want to repay the loan. For example, suppose you take a loan for a period of 20 years and repay it in 10 years. But, suppose your tenure goes to 25 years due to rate hike. In such cases there is a need to increase the EMI by at least 10 percent. By making prepayments, ensure that the tenure is not extended. This will reduce your debt burden.
Get home loan details from your bank or financial institution. What is the interest rate? Find out how much EMI is being paid and how many years are left. This will give you clarity on what to do.
