Going For A Home Loan? Here's How To Save Lakhs In Interest

Buying a home is often the biggest financial commitment of a person's life. But the price on the property brochure is only part of the cost. The bigger bill can come later.

For a home loan running 20, 25 or even 30 years, the interest can run into several lakhs. In some cases, it can even approach or exceed the amount originally borrowed.

That is why the way you repay the loan matters almost as much as the interest rate you negotiate at the start.

Vinayak V Deousker, Chief Business Officer, Easy Home Finance, says borrowers can reduce this burden through a few disciplined moves. The key, he points out, is to start early.

Why The First Few Years Of A Home Loan Matter

A home loan EMI has two parts -- principal and interest. In the early years, a larger portion of the EMI generally goes towards interest. As the outstanding principal falls, the interest component gradually comes down.

That makes the initial years an important window for borrowers. "Most of the interest gets loaded into the early years of the loan. That's exactly why the first few years matter so much when it comes to saving money," Deousker said.

This is where prepayments can make a major difference. Any extra amount paid towards the principal reduces the outstanding loan. Future interest is then calculated on a lower balance.

So, a bonus, tax refund or other windfall need not always go towards discretionary spending. Putting even a portion of it into the home loan can help.

Deousker said that something as simple as making one additional EMI payment every year can potentially cut two to three years from a 20-year loan, depending on the loan terms and interest rate.

One Extra EMI Can Make A Difference

The idea is simple. Suppose a borrower gets an annual bonus. Instead of treating it as extra spending money, they use it to make an additional loan payment.

The borrower continues with the regular EMI. But the additional payment chips away at the principal. Over time, this can reduce both the outstanding balance and the interest payable.

The earlier such payments are made, the greater their potential impact. Borrowers should, however, check their lender's terms before making any large prepayment.

For floating-rate term loans sanctioned to individual borrowers for non-business purposes, RBI rules prohibit regulated lenders from charging foreclosure or prepayment penalties.

Don't Automatically Choose A Longer Tenure

A longer tenure makes the EMI look attractive. But there is a catch. You stay in debt for longer and pay interest for more years.

Take a hypothetical Rs 50 lakh loan at 8 per cent interest. Over 20 years, the EMI works out to roughly Rs 41,800. The total interest over the full tenure would be around Rs 50.4 lakh.

Stretch the same loan to 30 years and the EMI falls to about Rs 36,700. That sounds easier on the pocket. But the total interest shoots up to roughly Rs 82.1 lakh. The difference is more than Rs 31 lakh.

The exact numbers will vary with the lender, rate and loan structure. But the example shows why a lower EMI does not necessarily mean a cheaper loan. If your income allows it, a shorter tenure can therefore make financial sense.

Can't Afford A Bigger EMI? Increase It Every Year

Not everyone can commit to a sharply higher EMI from day one. There is another way -- increase the EMI as your income rises.

Deousker suggests increasing the EMI by around 5-10 per cent each year, where affordable. This allows the repayment burden to grow alongside income instead of remaining unchanged for two or three decades.

For someone receiving annual increments, this can be easier than committing to an extremely high EMI at the beginning. It can also help bring down the tenure significantly.

But there is one rule: don't increase the EMI so aggressively that you are left without enough money for emergencies, insurance, investments and other essential goals.

A Bigger Down Payment Can Save Interest Too

The easiest interest to avoid is interest on money you never borrow. A bigger down payment means a smaller loan. That means a lower EMI and, more importantly, less interest accumulating over the life of the loan.

If your finances permit it, increasing the down payment by even 5-10 per cent can reduce the amount you need to borrow. But don't empty your savings account just to increase the down payment.

Homebuyers should retain an adequate emergency fund and account for registration, stamp duty, interiors, moving costs and other expenses that come with buying a property.

Should You Transfer Your Home Loan?

A lower interest rate from another lender can look tempting. But a balance transfer is not automatically a money-saver.

There are processing fees, legal and administrative costs and paperwork involved. The borrower should compare the total cost of switching with the interest savings over the remaining tenure.

Deousker said a balance transfer is generally worth considering when the new rate is at least around 0.5 percentage point lower and there are still more than 10 years left on the loan.

The bigger the outstanding principal and the longer the remaining tenure, the more important this calculation becomes. Do the maths before signing the transfer documents.

Your Credit Score Can Also Save You Money

A credit score is not just about getting a loan approved. It can influence the terms offered to you.

A strong credit history, stable income and manageable debt burden can put a borrower in a better position while negotiating with lenders. This becomes particularly useful when you are looking for a lower rate or asking your existing lender to review your pricing.

So, keep EMIs and credit-card dues under control. Avoid unnecessary borrowing. And check your credit report periodically for errors. As Deousker puts it, these steps do not require deep pockets. They require discipline and regular review.