Smart Strategies for Paying Off Your Home Loan Faster
Home loan EMIs take up a considerable part of a person’s monthly income. In general, people spend up to 40% of their income on home loan EMIs. Further, with the recent interest rate hikes, home loan EMIs are becoming more expensive than ever. Moreover, since home loans are a long-term commitment, paying EMIs continuously for years can easily become stressful. So, with the core goal of helping home loan borrowers get some relief and become debt-free quickly, this article discusses strategies that one can use to repay their home loan quickly.
Smart Strategies to Repay Your Home Loan Faster and Become Debt-Free Quickly
1. Plan Well and Do Budgeting
If you are planning to avail of a home loan, the first thing you must do is use a home loan EMI calculator to figure out the loan amount you can easily borrow and the loan EMIs you can easily repay. Once you know these two things, you will be in a much better position to decide what home loan amount will be ideal for you, which in turn, will make loan repayment easy. This will also ease the burden of loan repayment. Further, after you have decided on the loan amount you wish to avail yourself of, do budgeting. Sit down and make a list of your fixed and variable expenses.
Once you have this list, figure out what expenses are unnecessary and what expenses you can cut down on. Do away with the unnecessary expenses. Further, make sure you are setting aside at least 25% of your monthly income and depositing it into a savings account. Eventually, you can use these savings to prepay or foreclose your loan and completely do away with the burden of EMIs.
2. Make Part Prepayments Whenever Possible
In 2012, the Reserve Bank of India came up with a new rule as per which banks and lenders cannot charge a penalty from borrowers on floating interest rates should they decide to foreclose or prepay their loan. Home loan borrowers who want to become debt-free quickly must make the most of this rule. If you are a salaried person, you must get a bonus each year. You must also be enjoying regular pay hikes. On the other hand, if you are a self-employed individual, you must have good months when cash inflow is much higher than cash outflow.
Instead of splurging your bonus or the extra money from a good business deal on shopping or taking a luxury trip, you must use the money to prepay your loan. Making lumpsum payments towards your loan each year will help you bring down the principal amount and therefore, the effective EMIs. It will also help you reduce the total interest outgo and the total cost of borrowing the loan.
3. Match Any Increase in Your Income with an Increase in Your EMI
If you want to become debt-free quickly, you must learn to practice financial discipline. The majority of people grow in life and do well for themselves. However, whenever they experience a pay hike or a job promotion, instead of trying to become debt-free, most people also make the mistake of improving their standard of living. This means more money starts going towards dinners at expensive restaurants and holidays abroad. If you want to repay your home loan quickly, match the growth in your income with an increase in your EMI. If your income has increased by 10%, increase your EMIs by 10% too. This will help you repay your home loan quickly.
4. Consider Liquidating Your Savings
If becoming debt-free by repaying your home loan before the agreed loan tenor is your priority than you can even consider liquidating your other savings, such as a fixed deposit you may have made or the shares that you had bought a couple years ago. However, do keep in mind that you must liquidate your savings after thinking thoroughly and taking the advice of an expert as these saving instruments may have the potential to fetch you greater returns in the future.
5. Lastly, Use Home Loan Tax Benefits to Your Best Advantage
Home loans offer several benefits and one of these many benefits is that they allow home loan borrowers to save a considerable amount of money in taxes each year. Under Section 80C of the Income Tax Act, home loan borrowers can save up to a maximum of Rs.1.5 Lakh on payments made towards the repayment of the principal amount, and under Section 24b, they can claim tax benefit up to a maximum of Rs.2 Lakh on payments made towards interest component repayment of the home loan.
Over and above this, there are other sections as well that can help borrowers save more money by way of a home loan. Unfortunately, most people use the money saved by way of home loan tax benefits to take care of their needs and desires. However, if they use the same money to prepay their loan or increase their EMIs, they can become debt-free much more quickly.