A home loan, as an institution, has to be seen long-term but closes much before tenure if properly planned and executed using smart strategies. Closing a home loan early saves significant interest costs apart from reducing financial burdens on the client’s part.
In this article, we will explore seven effective ways to close your home loan early, ensuring financial freedom.
1. Pre-Payments
Pre-payments are one of the most effective methods through which one can reduce their tenure and outgo interest on home loans. Lump-sum pre-payments will reduce the outstanding principal amount at whatever time one gets extra funds in hand.
- Key Features:
- Most lenders allow pre-payments without penalties for floating-rate loans.
- Even small pre-payments made regularly can make a significant difference in reducing your loan tenure.
- Example: If you pre-pay INR 1 lakh annually on a loan of INR 50 lakh with a tenure of 20 years, you can potentially reduce the tenure by 5 years.
| Parameter | With Pre-Payments | Without Pre-Payments |
|---|---|---|
| Loan Tenure (Years) | 15 | 20 |
| Total Interest Paid | INR 25 lakh | INR 35 lakh |
2. Elevated EMIs
Another smart way of closing your home loan early is by increasing the EMI amount. This will work well in case your income has increased with time.
- Key Features:
- Increased EMIs pay off the principal amount faster.
- It reduces the interest paid during the loan tenure altogether.
- Example: Consider the case, for instance. Increase your EMI from Rs 40,000 to Rs 50,000 on the same 20-year loan amount of Rs 40 lakh; you can end up saving up to 4 years in tenure besides considerable interest charges.
| Parameter | Elevated EMIs | Regular EMIs |
| Loan Tenure (Years) | 16 | 20 |
| Total Interest Paid | INR 22 lakh | INR 30 lakh |
3. Shorter Tenor
Getting an optional shorter tenure on signing or refinancing to a shorter tenure subsequently can help reduce the interest burden by a huge margin.
- Key Features:
- The higher the EMI, the more significant the reduction in long-term savings.
- Such a loan is ideal for those who have stable and high income.
- Example: For instance, INR 30 lakh at 8.5% for 10 years pays lesser total interest than INR 30 lakh at 8.5% for 20 years.
| Parameter | 10-Year Tenure | 20-Year Tenure |
| EMI (INR) | 39,000 | 25,000 |
| Total Interest Paid | INR 12 lakh | INR 25 lakh |
4. Balance Transfer
Home loan balance transfer helps you shift your loan to a lender offering a lower interest rate. This can be very useful in case the lender you are dealing with is offering rates higher than the market average.
- Key Features:
- Helps in saving on the interest paid
- Can also help in getting better loan terms and better customer service.
- Example: Shifting a loan of INR 50 lakh from an 8.8% interest rate to an 8.3% interest rate can save up to INR 3 lakh over the remaining tenure.
| Parameter | Before Transfer | After Transfer |
| Interest Rate (%) | 8.8 | 8.3 |
| Total Savings (INR) | 0 | 3 lakh |
5. Strategic Down Payment
A higher down payment reduces the loan amount and, subsequently, the interest burden. This is the best strategy for borrowers who have sizeable savings.
- Key Features:
- Reduces the principal amount borrowed.
- It leads to lower EMIs and a shorter repayment period.
- Example: Paying a down payment of INR 15 lakh on a home valued at INR 50 lakh reduces the loan amount to INR 35 lakh, thereby drastically reducing the interest cost.
| Parameter | Larger Down Payment | Minimal Down Payment |
| Loan Amount (INR) | 35 lakh | 45 lakh |
| Total Interest Paid | INR 10 lakh | INR 15 lakh |
6. Timely EMI Payments
This helps ensure that the loan tenure remains in place without any penalties or additional charges for late EMI payments. A delayed payment increases the loan tenure unnecessarily.
- Key Features:
- No extra interest or penalty charges
- Maintains good credit score to be refinanced later
- Example: The original tenure of 20 years will be maintained with timely EMI payments, thereby saving up to INR 2 lakh on additional interest.
| Parameter | Timely Payments | Delayed Payments |
| Loan Tenure (Years) | 20 | 22 |
| Additional Cost (INR) | 0 | 2 lakh |
7. Capitalize on Tax Benefits
You can save tax under sections 80C and 24(b) and hence, reduce your financial burden and pre-pay more amount.
- Key Features:
- You can claim up to INR 1.5 lakh on principal repayment under Section 80C.
- You can claim up to INR 2 lakh on interest repayment under Section 24(b).
- Example: A borrower who claims full tax benefits can save up to INR 50,000 annually that can be utilized for pre-payments.
| Parameter | With Tax Benefits | Without Tax Benefits |
| Annual Savings (INR) | 50,000 | 0 |
| Potential Pre-Payments | INR 50,000 | 0 |
Conclusion
Closing a home loan early requires discipline, planning, and the right strategies. You can significantly reduce the financial burden by leveraging pre-payments, increasing EMIs, opting for a shorter tenure, or even transferring your balance to a lower-interest lender. Strategic down payments, timely EMI payments, and utilizing tax benefits can further accelerate your loan closure.
Early closure does not only bring relief in terms of financial savings but also the opportunity to direct your sources towards other goals. You should consider your choices, discuss them with your lender, and implement these strategies towards achieving your dream: becoming debt-free.
