Strategies to Repay Home Loan Faster

Owning a home is a significant milestone for many individuals and families. However, the process of repaying a home loan can sometimes feel daunting. Fortunately, there are proactive steps you can take to reduce your home loan burden and achieve financial freedom sooner. Here, we'll explore three effective strategies to help you pay off your home loan faster and save on interest costs. However, we have listed few other strategies, that will help recover the interest expenses incurred on home loan.

Suppose an outstanding loan of 1 crore for 25 years @9%p.a.

1. Make Extra Payments Regularly:

One of the most straightforward ways to reduce your home loan is by making extra payments whenever possible. This can be achieved through various methods:

• One extra EMI Payment every year: An extra EMI payment involves making one additional instalment towards your home loan principal every year, on top of the regular EMIs. This extra payment directly reduces the outstanding loan amount, leading to faster loan repayment and interest savings over the loan term.

  This alone will reduce your home loan from 25 years to 20 years.

• Step up EMI by 5% Every year: A Step-Up Equated Monthly Installment (EMI) plan is a dynamic repayment strategy that involves gradually increasing the EMI amount over time. This proactive approach can significantly reduce the loan tenure and overall interest costs for home loan borrowers. In a Step-Up EMI plan, borrowers start with a lower EMI amount initially and progressively increase the EMI amount at predefined intervals, typically on an annual basis. This incremental growth in EMI payments aligns with borrowers' increasing income levels over time, allowing them to repay the loan faster and save on interest expenses.

  This strategy will reduce your home loan from 25 years to 13 years.

• Combine the above two strategies together : Increase your monthly EMI by 5% every year and pay one extra EMI Every year together will reduce your home loan from 25 years to 10 years straight. This would definitely mean more cash outflow but will also enable to reduce the tenure of home loan which would save on interest expense.

2. Refinance Your Home Loan:

Refinancing your home loan can be a strategic move to lower your interest rate and overall loan costs. Here are a few ways refinancing can help:

• Lower Interest Rates: If market interest rates have decreased since you took out your home loan, refinancing allows you to switch to a new loan with a lower interest rate. This not only reduces your monthly payments but also lowers the total interest paid over the loan term.

• Change in Loan Tenure: Refinancing also gives you the option to extend or shorten your loan tenure based on your financial goals. While extending the tenure reduces your monthly payments, opting for a shorter tenure can help you repay the loan faster and save on interest.

• Switching to a Different Loan Type: Depending on your financial situation, you may consider switching from a fixed-rate loan to a floating-rate loan or vice versa. Evaluate the pros and cons of each loan type to determine which aligns better with your repayment strategy.

3. Utilize Tax Benefits and Deductions:

In India, home loan borrowers can avail of tax benefits under various sections of the Income Tax Act. By leveraging these tax deductions effectively, you can reduce your overall tax liability and allocate the saved funds towards your loan repayment. Here are some key tax benefits related to home loans:

• Section 80C Deduction: Principal repayments towards your home loan qualify for deduction under Section 80C of the Income Tax Act, up to a specified limit. Ensure that you maximize this deduction by investing in eligible instruments and reducing your taxable income.

• Section 24 Deduction: Interest payments on home loans are eligible for deduction under Section 24 of the Income Tax Act. The deduction limit varies based on whether the property is self-occupied or rented out. Optimize this deduction to minimize your tax burden and save on interest costs.

• Joint Home Loan Benefits: If you've taken a joint home loan with a co-borrower, both individuals can claim tax benefits proportionate to their ownership share in the property. Explore this option to maximize tax savings and accelerate your loan repayment strategy.

Reducing your home loan burden requires a combination of proactive financial planning, strategic decision-making, and leveraging available resources such as tax benefits and refinancing options. By making extra payments, refinancing at favorable terms, and utilizing tax deductions effectively, you can expedite your journey towards debt-free homeownership and financial security.