Being An Early Bird Can Save You Lakhs On Home Loans—Here’s How

We’ve all heard the saying, 'The early bird catches the worm,' and in the world of home loans, the early bird catches the biggest savings. Think less time paying off your loan, less interest, and more money in your pocket. Sounds too good to be true? Think again. With interest rates rising and property prices soaring, it's more important than ever to consider how you can minimise the financial burden of your home loan. According to Mohit Gang, co-founder & CEO of Moneyfront, "Prepaying your home loan and shortening your tenure can dramatically reduce the amount of interest you pay over time, saving you lakhs. It’s all about acting early."

With the Reserve Bank of India (RBI) increasing interest rates to combat inflation, the cost of borrowing has gone up significantly. This means that for home loan borrowers, the price of a home isn't just the property cost anymore. It's also the interest outgo, which can often double the price of your property over a 20- or 30-year loan period.

Gang breaks it down for us with an example. If you take a Rs 1 crore home loan for 20 years at an interest rate of 9%, you’ll pay approximately Rs 1.15 crore as interest, bringing the total cost of your property to around Rs 2.15 crore—more than double the original loan amount. But here’s the good news: You don’t have to settle for paying this much. "The earlier you start making prepayments or reduce your loan tenure, the more you save in interest," he adds.

Many borrowers may think that paying off a home loan early requires huge lump sums. However, even small, consistent prepayments can make a huge difference. Take a scenario where you have a Rs 1 crore loan with a 20-year tenure. If you were to increase your EMI from Rs 91,000 to Rs 1,01,000, shortening the tenure by just 5 years, you could save Rs 33 lakh in interest over the life of the loan. "Shortening the tenure not only reduces the interest burden, but also helps you pay off the loan faster," Gang explains. If you're feeling a little more ambitious, pushing your EMI to Rs 1.26 lakh can shrink your loan tenure to 10 years, saving you up to Rs 63 lakh in interest payments. "This is the magic of shortening the tenure," Gang adds. "You may feel a little pressure on your monthly budget, but the long-term savings are worth it."

What if you don’t have the capacity to increase your EMI drastically? Gang has a simple solution: "Pay just one extra EMI every year. If you were to do this for the first three years of your loan, you would save Rs 12.5 lakh on your Rs 1 crore loan." This is especially effective during the first few years, when a large portion of your EMI goes toward paying the interest rather than the principal.

"The first few years of a home loan are crucial," says Gang. "You're only paying off around 4-5% of your principal during this time, so any extra payments help reduce your interest outgo substantially."

Prepaying your home loan isn’t as complicated as it sounds. "Just log into your bank account, and you can make an extra payment anytime. Many banks even allow two prepayments a month, and the process is smooth and hassle-free," shares Gang. However, it’s important to keep an eye on the rules around prepayments. "Banks cannot charge you for prepaying your loan," he clarifies. "If you’re being charged for making prepayments, it's a red flag. The RBI has made it clear that there should be no prepayment penalties."

Additionally, while many people stick to long loan tenures to reduce their EMIs, Gang advises against it. "Shorter tenures are better for your finances," he emphasises. "People often opt for longer tenures, but paying a little more upfront, like opting for a 15-year loan instead of 20 years, saves you much more in the long run."

With interest rates fluctuating, it’s essential to keep an eye out for better loan options. "Money management is a game of inches," says Gang. "A small difference in interest rates can make a big difference in your total repayment amount."

So, if you’ve been stuck with the same lender for years, it might be time to shop around. "Refinancing your loan can save you money, especially if you have a substantial amount left to pay," Gang advises. Banks are often willing to offer better terms to retain customers, so don’t hesitate to ask for a better deal.

As Gang concludes, "The sooner you act on shortening your loan tenure or prepaying your loan, the more you save in the long run." Whether you’re making extra payments or refinancing for better rates, the key is to take action as early as possible. By being proactive about your home loan, you can reduce your interest burden and save lakhs over time.