6 Effective Ways to Pre-pay & Foreclose Your Home Loan

Yet, as careers progress and incomes rise, the prospect of pre-paying or foreclosing a home loan becomes increasingly tempting. If you are considering such a decision, this article offers insight into six effective ways to pre-pay and foreclose your home loan, guiding you towards informed financial choices.

How you manage your loan repayments holds the power to shape your credit score, an important determinant of your creditworthiness. While some borrowers opt for gradual repayment over the entire loan tenure, others seek to expedite the process by embracing prepayment or foreclosure options.

Unfortunately, many borrowers choose these routes without a comprehensive understanding of their implications, often incurring unnecessary fees and charges. To ensure informed decision-making regarding your home loan repayment strategy, it's imperative to understand the difference between home loan prepayment and foreclosure.

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What Is Home Loan Prepayment?

Prepayment of a home loan entails utilising surplus funds to alleviate your existing home loan burden before the scheduled end of the loan term. This facility, provided by banks and other financial institutions, permits borrowers to settle their home loans ahead of time, either partially or in full.

By reducing the outstanding loan amount, prepayment yields a twofold benefit: reduced interest expenses and truncated loan tenure. Many borrowers use windfalls like bonuses or profits to seize the opportunity to expedite debt clearance. Given that interest accrues on a daily reducing balance and EMIs adjust according to the latest outstanding amount, the impact on total interest outflow and loan duration can be substantial.

What Is Home Loan Foreclosure?

Foreclosure of a loan, as the term implies, involves the borrower settling the entire outstanding loan amount before the designated end of the loan term. This legal procedure carries significant advantages, notably in terms of reducing interest expenses and liberating oneself from debt. Financial institutions typically permit home loan foreclosure after a specified period, the duration of which varies depending on the lender.

If your loan meets the criteria for foreclosure, you can initiate the process by submitting an application to your lender. They will then assess factors such as your outstanding balance, remaining loan tenure, and interest paid before providing a quote. Upon approval, you can proceed to settle the requisite amount for loan foreclosure, thereby reclaiming your original documents and obtaining a No Objection Certificate (NOC) from the lender.

[Also Read: 9 Essential Steps for a Successful Home Loan Application]

1. Home Loan Refinancing:

Home Loan Refinancing, alternatively termed Home Loan Balance Transfer, is a type of loan that enables borrowers to shift their existing home loan from one lender to another, typically at a lower interest rate. This strategic move holds the potential to yield several benefits, including lower monthly repayments and a decreased total cost of the loan. By capitalising on the opportunity to secure a more favourable interest rate, borrowers can curtail interest charges throughout the loan tenure, thereby expediting the repayment process.

For instance, consider a scenario where a homeowner has been servicing a home loan with a particular lender for several years. Upon discovering that another lender is offering a substantially lower interest rate, the homeowner decides to opt for a home loan balance transfer. By transitioning the loan to the new lender at a reduced rate, they can enjoy lower monthly payments and a diminished overall loan cost.

Nevertheless, before committing to a home loan balance transfer, it is advisable to conduct thorough due diligence. Evaluating the costs and benefits associated with the transfer, including any applicable fees, is essential.

Additionally, comparing offers from multiple lenders is advisable to secure the best deal. It is crucial to consider the long-term implications of the balance transfer on one's financial objectives and overall financial health. By weighing these factors, borrowers can make informed decisions regarding home loan refinancing that align with their financial goals.

2. Make Extra Payments:

One effective strategy to expedite the repayment of your home loan is to make extra repayments whenever feasible. This entails surpassing the minimum EMI amount or making lump sum payments whenever surplus funds become available. By adopting this approach, you can effectively reduce both the principal amount of your loan and the accruing interest.

For instance, suppose you've secured a home loan amounting to Rs 1 crore with an interest rate of 9% spanning a 25-year tenure, equating to a monthly EMI of around Rs 84,584. Now, if you decide to increase your regular payments by an extra Rs 15,000 each month, you might successfully clear the loan in just 17 years and 8 months. This financial move not only accelerates the repayment process but also yields substantial savings, potentially slashing the total interest outlay by more than Rs 80 lakhs.

However, before embarking on the path of making extra repayments, it's imperative to assess whether any prepayment fees or restrictions apply. Notably, many home loan lenders refrain from imposing prepayment penalties for borrowers opting for a floating rate of interest.

Therefore, it's essential to scrutinise the terms and conditions of your loan agreement to determine the feasibility and potential benefits of making additional repayments. By taking this proactive approach, borrowers can accelerate their loan repayment journey while minimising overall interest expenditure.

3. Increase the Amount of Your EMI:

One strategy to expedite the repayment of your home loan is to increase the amount of your Equated Monthly Instalment (EMI). By opting for a higher EMI, you can accelerate the repayment timeline and reduce the overall interest burden on your loan.

For example, let's consider a scenario where you have a home loan of Rs 80 lakhs with an interest rate of 7.5% over a 20-year period, resulting in a monthly EMI of approximately Rs 63,928. Now, if you decide to increase your EMI by an additional Rs 5,000 per month, the loan tenure can potentially be reduced to 16 years and 9 months. This proactive approach not only shortens the repayment period but also leads to significant interest savings over the loan term.

[Also Read: Here's How You Can Plan the Down Payment for Your Home Loan with Mutual Funds]

4. Use Windfall Income:

Using windfall income can be a strategic method to expedite the repayment of your home loan. Windfall income includes unexpected or sporadic earnings, including bonuses, incentives, gifts, inheritances, or lottery winnings. However, before using this approach, it's crucial to consider several factors:

• Your liquidity and emergency needs: Ensure you maintain a sufficient emergency fund to cover at least six months of living expenses and any unforeseen financial obligations.

• Prioritise high-interest obligations: Consider paying off other high-interest debts, such as credit card balances, before allocating windfall income towards your home loan.

• Investment opportunities: Evaluate potential investment avenues to determine if the returns surpass the interest accrued on your home loan. If so, you may opt to invest the windfall income in suitable options such as mutual funds and stocks.

For instance, suppose you receive a bonus of Rs 1 lakh unexpectedly. After assessing your financial situation and considering the factors mentioned above, you decide to allocate this windfall income towards your home loan.

By utilising the bonus to make an additional lump sum payment towards your loan principal, you can potentially reduce the loan tenure and overall interest expenditure. This strategic use of windfall income accelerates your journey towards debt freedom while optimising your financial resources.

5. Choose a Shorter Home Loan Tenure:

Consider selecting a home loan repayment period shorter than the maximum available tenure. While opting for a shorter loan tenure can expedite debt repayment, weighing this decision against its potential impact on your monthly budget and cash flow is essential.

Keep in mind that a shorter tenure typically translates to higher Equated Monthly Instalments (EMIs), which may strain your financial resources. Therefore, it's crucial to opt for a loan tenure that aligns with your repayment capacity, ensuring it doesn't unduly impact your lifestyle and savings.

For example, suppose you're eligible for a home loan with a maximum tenure of 30 years. However, after evaluating your financial situation and considering factors such as income stability and future financial goals, you decide to opt for a tenure of 20 years instead. While this results in higher monthly EMIs, it enables you to clear the debt sooner and reduces the total interest paid over the loan term.

By choosing a shorter loan tenure within your repayment capacity, you strike a balance between accelerated debt repayment and financial sustainability. Use PersonalFN's Home Loan EMI Calculator to calculate your home loan EMI and total interest payment by adjusting the loan tenure to your preference.

6. Set a Goal to Become Debt-free and Invest Towards It

Establishing a goal to achieve debt-free status and actively investing towards this objective can serve as a powerful motivator and financial strategy. By prioritising paying off debt and simultaneously investing towards your financial independence, you can create a structured approach to attain long-term financial security.

For example, let's say you have a home loan with a remaining balance of Rs 50 lakhs and an interest rate of 9% over a 25-year tenure. Rather than solely focusing on making regular EMIs, you decide to set a goal to become debt-free within the next 15 years. To achieve this goal, you meticulously plan your finances, allocate additional funds towards loan repayment, and streamline your expenses.

Simultaneously, you commit to investing a portion of your income towards diversified investment avenues such as mutual funds, stocks, or retirement accounts. By consistently contributing to these investments, you aim to build a robust financial portfolio that complements your debt repayment efforts.

As you progress towards your goal, you monitor your financial milestones closely, celebrate achievements, and adjust your strategies as needed. Eventually, by staying disciplined and focused on your objective, you successfully clear your home loan and emerge as a financially empowered individual with a secure investment portfolio.

This proactive approach to living a debt-free life and investment not only fosters financial stability but also sets the stage for long-term wealth accumulation and prosperity.

To conclude:

Home loan repayment requires careful consideration of various strategies and financial factors. From exploring options like prepayment and foreclosure to making extra repayments and leveraging windfall income, there are numerous avenues to accelerate debt clearance and achieve financial freedom.

However, it's essential to tailor these approaches to your individual circumstances, ensuring they align with your repayment capacity, lifestyle, and long-term financial goals. Adopting a proactive and informed approach towards loan repayment and prudent investment decisions can pave the way towards a debt-free future and unlock opportunities for wealth accumulation and financial security.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.