While the millennials are looking for new avenues of living opportunities, the real estate market continues to open up new opportunities for people looking to owning their own home. With the increase in purchasing power of the consumers, property rates have shot up to the sky in all the major cities. As a result, the interest rates on purchasing property have gone up significantly as well. This has discouraged many home-buyers to invest in such properties.
While you should remember the rules of good investing and try to avoid loans that raise EMIs more than 50% percent of your income, there are certain ways in which you reduce the burden of monthly installments, when purchasing a property:
- Pay a higher down payment – The Reserve Bank of India specifies the minimum percentage of down payment you should make to get a loan approved. The interest rate is then calculated as a percentage of the remainder of the amount. Hence, putting down more money out front would result in a decreased EMI to be paid in consecutive years.
- Be regular on your payments – You must understand the burden of a home loan before committing it. Not paying your dues on time will only compound on to bigger problems in the future. The principal amount might be the same, but the interest will keep on growing in periods of non-payment. So, it is a good practice to make regular payments or even pre-payments if you can maintain a lower rate of interest charged on the principal amount of loan.
- Choose a shorter loan tenure – While this means that you will have to compromise on the EMI being paid every month, the effective interest rate on the loan amount will decrease. Longer tenure of loan repayment means that the person will have to shell out interest on the principal amount for a longer time. As we can clear a see, a loan extended is a loan with a much higher total due amount compared to those who were paid relatively in a shorter period.
- Increase EMI rate annually – If you are a salaried employee, there is a good chance that you are receiving an annual increment in your salary. You can use this to your advantage by increasing the EMI rate you have to pay for your remaining principal amount. This will help you in reducing the net interest amount to be paid off to the bank. Even a small percentage of increment every year can go a long ways to reduce the net amount to be paid off to finish the debt.
- Pay extra EMIs – Another smart method to repay your home loan is to pay extra EMIs to the bank in case you stumble upon any extra sum of money. Finishing off your home loan faster is the most effective way to lower the overall interest rates. Also, banks are more than happy to receive extra payment from your side. An increased annually or monthly deposit of 10-20% can help you save your final interest amount by an astonishing 40-50% in certain cases.
- Switching to MCLR – Homeowners that have taken a home loan before the April 2016 switch for the marginal cost of funds based lending rate (MCLR) to reap the benefits of fluctuating loan interest rates. You will be however subjected to a small conversion fee, hence it is advisable to perform an analysis of your current home loan before making the switch.
- Comparing the options – It is always advisable to compare the rates of several institutions before raising a loan. In the current world, there are options where you can switch your banks during the repayment period itself. Be sure to check out all the terms and conditions before entering any such switching agreement. If it looks profitable to you, make the switch as soon as possible.
While differences in small percentage might not look much on the paper, they can add up to big amounts in the long run and help you reduce the interest amount to be paid on the home loan significantly. Be aware, a smart buyer is a happy buyer!