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Published On: Wed, Sep 12th, 2018

Money Saving Ideas: Important Tips before Taking a Home Loan

  • A short tenor reduces the interest outgo
  • Floating rates are usually lower than the fixed rate
  • Prepayment reduces the principal amount and EMI
  • Bajaj Finserv Flexi Hybrid Loan offers a principal holiday of 4 years

photo/ mohamed Hassan

An effective mode of finance to help you address an essential life goal, the home loan market is extremely competitive due to thepresence of housing finance companies and non-banking financial companies (NBFCs).With the government’s initiatives towards affordable housing, analysts expect the demand for home loans to further surge in the coming days. While a home loan gives you the funds to buy your dream home, it’s a long-term commitment that requires you to pay regular EMIs for a long period, 15-20 years and even more, which has a significant impact on your financial well-being. Read on to know some prudent tips that help you save money on your home loan.

Opt for a Short Tenor

The tenor of the home loan is an essential factor that dictates the outflow of money in the long run.Note that during the initial tenor, a chunk of the EMI amount consists of the interest component with very little going towards the principal. However, as the tenor increases the principal amount increases and the interest amount comes down. Note that a long tenor might reduce the EMI amount but increases the interest outgo significantly.

On the other hand, a short tenor might increase the EMI, but keeps a tight lid on the interest outgo as highlighted in the table given below:

Loan amount Tenor Assumed rate of interest EMI per month Total interest payable Total payment (Principal + Interest)
Rs.20 lakh 20 years 8% Rs.16,729 Rs.20,14,844 Rs.40,14,844
Rs.20 lakh 15 years 8% Rs.19,113 Rs.14,40,354 Rs.34,40,354

 

As evident, a short tenor home loan helps you save manifold on the interest payable on your home loan. You can use this housing loan EMI calculator to know the EMI, the interest and the total payment on the home loan to be paid.

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Go for A Home Loan on Floating Interest Rate

You can take a home loan either on fixed or floating interest rates. While in a fixed rate, the rate of interest remains fixed throughout the loan tenor, in a floating rate, the interest rate varies according to the market dynamics.

In a floating home loan interest rate, you can benefit from a drop in the rates, which is not applicable in a fixed rate. Also, note that generally, floating rates are slightly lower than fixed rates. This helps you to make some savings on the interest cost of your home loan.

Provisions for Pre-Payment

Prepayment is a great way to save on EMIs, bring down the loan tenor, and make savings on your home loan. Prepayment reduces the principal amount, which subsequently leads to lower EMI. Note that home loans procured on floating interest rates don’t have prepayment penalties. Also, today most lenders in a bid to woo home loan borrowers waive off prepayment charges associated with a loan.

For instance, in the above example, if you prepay Rs.1 lakh of the Rs.20 lakh taken, the reduced EMI comes to Rs.15,892. Also, the tenor of the loan is reduced by a little over 2 years.You can use windfalls received in form of bonuses to prepay your home loan.

Look Out for Principal Holiday Period

New-age home loans such as Bajaj Finserv Flexi Hybrid Loan offer a principal holiday period of 4 years. It means for the first four years, you need to pay only the interest as EMIs and not the principal. Only after 4 years, for the balance tenor, the EMIs constitute the principal and the interest of the amount utilised. The principal holiday period ensures easy management of finances. Also, on this loan, there’s no restriction on the repayment of the principal amount.

Bajaj Finserv also offers pre-approved offers on a gamut of loans including home loan, personal loan, etc., that make it easy to avail finance. Share a few basic details to know about your pre-approved offer now.

About the Author:

Rupesh Singh is freelance writer and founder of moneyoutline.com You can follow him on Google + & Facebook.

About the Author

- Outside contributors to the Dispatch are always welcome to offer their unique voices, contradictory opinions or presentation of information not included on the site.

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