How to save interest on your home loan

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Home loan is an easy option to fulfill your dream, called “Home”. But, it’s painful when emi starts deducting from your account. You may end up in a mess if your home loan is not well planned.

Home loan image

Image source: Image by dashu83 on Freepik

Your emi is divided into two parts, interest & principal. Initially, your interest component would be significant. It is quite high during initial days, and gets reduced gradually over time. There are several ways you can save interest on your home loan.

Part-payment

Every loan provider gives you an option to prepay your loan twice or more times every year. You can select an amount greater than your monthly emi amount. It is most widely used option. Let’s take an example of Alex. Let’s assume Alex has taken a loan of 50 lacs with interest rate 8 percent for 20 years. This is how it looks like now.

Home loan interest payment for 20 years tenure

Now, if you decide to pay one EMI extra every year, you can actually save close to 13 lacs on interest and you will finish your loan repayment in 17 years.

Change in home loan after paying one extra emi every year

Increase EMI

If you are salaried individual, you get salary hike every year. Similarly, if you plan to increase your EMI every year after salary hike, you can save good amount of interest. Let assume Alex increases his EMI by 10 thousand, by the end of the loan term, Alex will save 20 lacs on interest and his loan will be fully paid in just 13 years. This is only after increasing EMI once. If he does this every year, after salary hike, the difference would be even bigger.

Home loan interest benefits after increasing emi

Reduce interest rate

Yes you heard this right. You can ask your loan provider to change the interest rate. There’s a famous line often hear – “Puchne me kya jata hai?” (What’s wrong in asking?).

I recently asked my bank executive to lower my home loan interest rate, and after checking something on his laptop, he said yes. After paying nominal charge, My interest emrate got reduced by 0.5 percent, which is quite significant. I saved some interest amount on my loan. A small tip, you can tell the bank executive that you are thinking about switching the loan provider, you may get rate reduction easily.

Change the Loan provider

This should be your last option for interest saving. If you have been getting negative answers from existing bank about interest rate reduction, you can try to look for another loan provider with lower interest rate.

This option is sometimes tedious, time taking and costly. You have to do your calculations right before applying for this change.

Utilize tax provisions on home loans under sections 80C & 24

Income tax by Nick Youngson CC BY-SA 3.0 Pix4free

Have you heard that some people tend to have home loans and be happy about it. You heard it right, You can actually save good amount of taxes if you have home loan especially you are paying higher interest and also fall in 30 percent tax bracket. Section 80C allows you to claim tax rebate of up to 1.5 lacs on principal amount while section 24 allows to to claim 2 lacs of annual interest amount.

If you fall under 30 percent tax bracket in India, then you can save up to 1,05,000 INR every year.

Summary

Home loans have become cheaper with significant rate reduction in India over last 10 years (excluding recent spike). You can reduce it’s financial impact further by using one of the above techniques.

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