Buying a home is the most significant financial and emotional investment. But, as years pass by, homes are getting costlier. Hence, most of us opt for a home loan which demands a commitment to pay an EMI for 20 to 30 years.
Yes, that’s quite a burden. But don’t worry. Today we will look at a strategy that will reduce your load. Moreover, using this strategy, you can pay your home loan in 10 years!
Steps to Repay Your Home Loan in 10 Years
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- Instead of 12 EMIs a year, add one EMI extra as a prepayment towards your loan.
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- As you get a salary hike yearly, increase your EMI by the same or an equivalent percentage.
Using these two rules, let’s see how you can repay your home loan in 10 years.
A Normal Scenario
Let’s say you had taken a home loan of Rs 50 lakh at an interest rate of 8% per annum for 25 years. You will have to pay an EMI of Rs 38,591 monthly for 25 years.
As we know, when you pay an EMI, a considerable chunk is spent towards interest, and a negligible amount is cut from your principal.
In this scenario, in 12 months, the total amount you will pay through EMIs will be Rs 4,63,090. But, from this huge amount, your contribution towards the principal will be mere Rs 68,106!
Moreover, in 25 years, you will be paying an interest of Rs 65 lakh to repay a loan of 50 lakh .
That’s an insanely massive amount towards interest. Don’t worry. Let’s apply the golden rules of repayment to this scenario.
Your Loan After Applying the Golden Rules of Repayment
1. Add One EMI Extra as a Prepayment Towards your Loan
If you are paying an EMI of Rs 38,591 monthly for a year, consider paying an EMI extra. By doing so, the 13th EMI you pay will be a prepayment towards your loan. Hence, it will be interest-free, and the entire amount will be cut from the principal amount.
It would be best if you made it a habit to keep pre-paying an extra EMI for the entire loan tenure.
The Outcome of Paying an Extra EMI
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- Your loan’s accumulated interest has dropped to Rs 49,74,020 from Rs 65,77,243! You have saved Rs 16 lakhs by paying an extra EMI every year.
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- Moreover, you have repaid your loan five years early! Your loan tenure has been reduced from 25 to 19.83 years!
2. As you get a salary hike yearly, increase your EMI by the same or an equivalent percentage.
Let’s say you get an increment of 10% on your salary every year. Consider increasing your EMI by the same or an equivalent percentage every year. This will help you pay a higher amount monthly without putting much burden on your pocket.
Outcome of Increasing Your EMI by 10% Every Year
The interest amount you were supposed to pay initially was close to Rs 65.77 lakhs which, after paying an extra EMI, dropped to Rs 49.74 lakhs. Now, if you increase your EMI by 10% yearly, your interest amount will be Rs 26,82,514! This means you have saved 42 lakhs in total as interest!
As you increase your EMI by 10% yearly, you will repay your loan in 119 months. You have reduced your loan tenure from 25 years to 9.9 years!
Conclusion
We just saw a strategy for repaying your 25 years long loan in 10 years! Yes, this is not magic. The Golden Repayment Strategy will help you disburse your loan as quickly as possible.
It is said that prepaying your home loan quickly is the biggest saving of your life. Yes, that’s undoubtedly true. Repaying a home loan faster gives you access to surplus money which can be used to achieve your goals in your life.
So, today let’s take an oath to reduce financial stress by following the Golden Rule of Loan Repayment.
