Home Loan Tips: The Reserve Bank of India’s decision to maintain policy rates at their current levels has left home loan customers feeling disappointed. As a result, it is unlikely that home loan rates will decrease in the near future. Due to the series of repo rate increases that occurred between May 2022 and March 2023, home loan EMIs have increased significantly, and loan tenures have been prolonged by several years.
If you are considering purchasing a home with a loan, here are five important factors to consider.
1. Shorter Loan Tenure: According to an ET report, experts recommend that borrowers keep their loan tenure as short as possible to minimize the interest burden. The longer the loan tenure, the higher the interest outgo due to the compounding effect. For example, a Rs 50 lakh loan at 9% interest for 10 years will result in a total interest payment of Rs 26 lakh. Extending the tenure to 15 years increases the interest outgo to Rs 41 lakh, and a 20-year loan will result in an interest outgo of Rs 58 lakh.
2. Importance of increasing EMIs: A shorter loan tenure can be challenging for young homebuyers, as the higher EMIs may not fit into their budget. If you must opt for a longer tenure of 15-20 years, try to increase the EMI amount gradually as your income rises. Increasing the EMI by 5% every year can reduce the tenure of a 20-year loan by nearly eight years. If you can manage to increase the EMI by 10% annually, then a Rs 50 lakh home loan with 9% interest rate will be paid off in just 10 years.
| How To Reduce Your Home Loan Tenure | |
| If you take a loan of Rs 50 lakh at 9% for 20 years, the EMI will be Rs 44,986 | |
| If EMI is… | Loan will end in… |
| Kept Constant | 20 years |
| Increased By 5% Every Year | 12 years 1 month |
| Increased y 10% Every Year | 9 years 5 months |
Prepayment becomes easier when you anticipate your income to grow each year. It is crucial to remember that prepayment has a more significant impact when the loan is new, so try to increase the EMI as early as possible. Any extra cash, such as proceeds from a maturing investment, a gift, or an annual bonus, should also be used to prepay the loan.
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3. Insurance: When considering a home loan, it’s crucial to evaluate the insurance options offered by the lender. While it’s wise to secure life insurance alongside a substantial loan to protect your dependents from unpaid debt, the policies sold by banks may have limitations. These policies are often linked to the loan and may not be transferable, meaning they will terminate if you switch lenders during the loan tenure. Therefore, it is advisable to buy separate term insurance, as the coverage will continue even if you prepay the loan or change your lender.
4. Link between loan rate and benchmark: Understanding the connection between the benchmark and loan rate is essential when selecting a home loan. Most home loans have floating rates tied to an external benchmark, such as the RBI repo rate, which has remained at 6.5% since June 2023. Lenders determine the reset period, which can be quarterly, half-yearly, or annually. Determine the frequency of the rate reset before taking a loan. Choose a loan that quickly reflects changes in the external benchmark rate.
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5. Joint loans: If you have a working spouse, consider taking a joint home loan to maximize tax benefits. The government allows a deduction of up to Rs 2 lakh on the interest paid on a home loan. However, with rising home prices, the average loan amount has increased significantly in recent years. At a 9% interest rate, a Rs 50 lakh home loan for 20 years would result in an annual interest of approximately Rs 4.5 lakh.
If your spouse earns as well, you can jointly claim up to Rs 4 lakh in deductions if both husband and wife take a joint home loan and each claims a Rs 2 lakh deduction individually. Additionally, some states offer lower stamp duty rates if the property is registered in a woman’s name. For example, in Delhi, the stamp duty is 6% for male buyers, while female buyers pay only 4%.
