Home loans might have terms of 10, 15, or even 25 years. You pay more interest on a mortgage with a longer term. Let’s assume you have a house loan of Rs. 50 lakh with a 20-year term and a 9% interest rate. In such situation, you may shell out roughly Rs 58 lakh in interest payments—more than the house’s accruing value.
The earnings from high-yield investments may be sufficient to pay the interest on the loan. A mutual fund systematic investment plan (SIP) may also assist you in recouping your interest over time.
Take this as an example.
Let’s say you have a Rs 30 lakh loan with a 20-year, 9% interest rate. You pay Rs. 34.78 lakh in interest over a 20-year period. Overall, you will pay back Rs. 64.78 lakh over a period of 240 months. By the time your debt is paid off, the extra Rs 3,000 will have grown to Rs 39.90 lakh if you invest Rs 3,000 per month in a SIP that offers returns at a 15% compound annual growth rate (CAGR) over 20 years.
You would still have accumulated Rs 32.68 lakh after deducting your contribution. Assume that you prepay the same amount each year, or Rs. 36,000 every 12 months. Your interest is reduced to Rs. 25.67 lakh and your tenor is changed to 15.5 years in this scenario. It represents a 7 lakh rupee and 4.5 year savings.
Adhil Shetty, CEO of BankBazaar, explains that by investing 0.01 percent of your loan amount monthly via a SIP in a mutual fund, you may accumulate a sum in 20 years that is more than your entire interest payment.
It is unrealistic to expect to get 15% regularly for 20 years, thus one must be reasonable while establishing that goal.
Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm, says that while one should regularly invest to avoid the effect of interest payments, they should also try to prepay loan with an increase in income or annual bonuses or any such windfall to reduce the interest outgo.
Additional Techniques To Lower The Cost Of A Mortgage
According to Atul Monga, CEO and co-founder of Basic house Loan, “While it is not possible to completely eliminate the interest on your home loan, there are certain strategies that can help reduce the interest burden.”
Make a greater down payment or pay off the loan early if feasible to lessen the principle and, therefore, the interest charged.
“Another strategy for lowering the total cost of borrowing is to take advantage of tax deductions under the previous tax system. In certain circumstances, consumers could also think about moving their loan amount to a lender with cheaper interest rates. This could result in a reduction in interest payments, but it’s crucial to take into account the fees and charges of a balance transfer, advises Monga.
Additionally, borrowers can ask their lender to restructure their home loan when interest rates are rising by either lowering the total amount owed or extending the loan’s term.