Paying Too Much Interest on Home Loans? Here is How to Repay your Home Loan Efficiently

Buying a house is the top priority of every individual in India, but due to the high property rates, it is not possible for everyone to buy a house. It involves a huge sum of money to buy a house. With the rising realty rates, people often turn towards Financial Institutions and Non-Banking Financial Companies (NBFCs) for financial aid to buy a house.

When you apply for a Home Loan, you need to plan it well. A loan can only be beneficial if you choose the right combination of the principal amount, interest rate and tenor. These are the three basic things that you need to consider while applying for a Home Loan. Also, it is important that you choose the right type of Home Loan interest. There are three types of interest rates that you can choose from for your loan repayment, they are:

  1. Fixed Interest Rate: A fixed interest rate is the basic and most common type of interest rate offered by the lenders. When you apply for a fixed interest rate for your Home Loan, the interest rate remains the same throughout the entire tenor of the Home Loan and cannot be changed. However, there is an adjustment clause for fixed interest rates wherein the lender can adjust your interest rates according to the market condition if it stays stagnant for a long time.

  2. Floating Interest Rate: Floating interest rates are considered as risky interest rate options to choose from, as the floating interest rate keeps changing according to the market rates.The rise and fall in the market rates cannot be predicted. Hence, you need to have a good market experience if you are applying for a floating interest rate.

  3. Hybrid Interest Rate: Seeing that the people were reluctant to apply for Home Loans due to the risk of fixed and floating interest rates, the lenders introduced a combination of both and named it Hybrid interest rates. In hybrid interest rates, you can choose to pay a part of your loan with fixed interest rate and the other with floating rate of interest.

People often feel relaxed when they get their Home Loan sanctioned, while they fail to notice that Home Loans usually have long tenors which can last till 10 to 15 years. It means that the applicant has to pay a high-interest amount as well as the EMI for the loan too.It can be understood with an example.

home loan balance transfer.jpg

For instance, if you have applied for a Home Loan of INR 50 lakhs at 10 percent interest rate and a tenor of 10 years. When you start repaying the loan, every year the interest rate of 10 percent which sums up to INR 5 lakhs gets added to your yearly repayment amount. It means that you have to pay an amount of INR 5 lakhs every year to the lenders as interest amount for the Home Loan.

The above situation may be terrifying, but there are ways and means, which you can use to make your loan repayment easier. You can choose to apply for a Home Loan with shorter tenor, which would save your interest amount from increasing on a yearly basis and would help you to close your loan faster.

If you are already repaying a Home Loan, but feeling stuck with a high-interest rate, then you can consider the following options.  

  1. Pre-payment: According to the Reserve Bank of India (RBI) guidelines, you will not be charged a pre-payment penalty for the foreclosure of a loan. Pre-paying a loan will help you save on your interest amount by ending the loan sooner.

  2. Balance Transfer: This might be the best option for the applicants with fixed interest rates. If you are stuck with a high-interest rate and are unable to pay the loan, you can opt for a Home Loan balance transfer wherein you can change your current lender and transfer the loan to a different lender that offers you minimum interest rate.

  3. High Down Payment: You can pay a higher down payment against the loan which will reduce the principal loan amount, resulting in a lower interest amount charged by the lender every year.

Home Loans can be a lifetime commitment, but if they go on for too long, they can be a burden and can affect your financial condition. It is important that you plan your Home Loan according to your financial conditions and choose the correct combination for the Home Loans.

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