Keep Loan Tenure Short
The longer your loan term, the more interest you pay. For example, a ₹50 lakh loan at 9% interest for 10 years means you’ll pay ₹26 lakh in interest. If you extend the term to 15 years, the interest increases to ₹41 lakh, and for 20 years, it jumps to ₹58 lakh. In the first year of a 20-year loan, you’ll pay ₹5.4 lakh, but most of that goes to interest, with only ₹93,000 reducing the principal. Even if interest rates change, a longer loan term means higher overall interest. So, try to keep your loan term as short as possible.
Increase EMI When Income Rises
A short loan term means higher EMIs, which can be tough for young people. If you must take a 15-20 year loan, consider increasing your EMI as your income grows. A 5% increase in EMI can cut a 20-year loan term by almost eight years. If you increase EMI by 10% annually, you can finish the loan in just 10 years. If your income rises by 8-10% each year, a 5% EMI hike won’t strain your budget. It’s best to increase EMIs early in the loan term, and use any extra cash, like bonuses, to prepay the loan.
Check if Lender Sold Insurance
It’s wise to get life insurance when taking a big loan, so your family isn’t burdened if something happens to you. However, the insurance sold by banks with home loans decreases as you pay off the loan. This insurance is also often tied to the loan, so if you refinance, the policy ends. It’s better to buy separate term insurance, which continues even if you pay off the loan early or switch lenders.
Understand Loan Rate and Benchmark
Most home loans have floating interest rates linked to an external benchmark, like the RBI repo rate, which has been 6.5% since June 2023. Lenders reset the rate periodically—quarterly, half-yearly, or annually. Before taking a loan, find out how often the rate is reset and choose one with quicker adjustments to benchmark rate changes.
Consider a Joint Home Loan with Spouse
The government offers tax benefits on home loan interest. Under Section 24b, you can claim up to ₹2 lakh in interest deductions. Home prices are rising, and many loans are now over ₹75 lakh. For a ₹50 lakh loan at 9% over 20 years, you’ll pay around ₹4.5 lakh in interest annually. If you and your spouse both work, a joint loan allows each to claim ₹2 lakh, totaling ₹4 lakh in deductions. Additionally, some states offer lower stamp duty if the property is in a woman’s name. For example, in Delhi, men pay 6% stamp duty, while women pay only 4%.
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