What is the best way to pay off a home loan faster?

What is the best way to pay off a home loan faster?

May be bit old school type, but you can try
Have a separate bank account wherein you transfer a fixed/variable amount of money every moth or every time you have extra savings . Then once you accumulate good corpus then do part payment of loan from that account… Frequency you can decide

My thoughts. There could be better way as well

Not sure of exactly what u meant by saying bestway to prepay the loan

I am assuming you would like to know whether prepaying a loan or using the money to invest is a better option

When it comes to prepaying a loan, please check if there are any fees which bank charge for prepaying the same

If alternate investments are giving you lower return than the loan interest rate plus prepayment fees if any then the best option is to prepay the loan

Do not use the emergency funds which u have accumulated to prepay the loan until it is an overdraft where u can draw it back

If there are no prepayment fees it is better to repay the loan.

Disc. These are my personal views only

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In addition to all the advice given above, if you are pre-paying the loan, write/direct the bank to apply the amount to PRINCIPAL only. Otherwise they will apply it towards EMI (interest + principal).

Update: this is not a valid suggestion in India.

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Sorry, but I couldn’t get it. Can u please elaborate? Thanks

Let’s say your loan principal amount was 1L, and your EMI is 1,000. This EMI amount has 2 components, interest and principal.

For the majority of the duration of the loan tenure, interest amount will be higher than principal. For example for a 30 year loan interest will be higher than principal for more than 22 years or so.

So if you pre-pay 1,000, and don’t specify how you like this 1,000 to be directed, the loan company will apply your 1,000 towards both interest and principal (it’s like you paid 1 month EMI in advance)… but only a small fraction of your 1,000 is applied towards reducing your principal amount.

But if you specify that you want your 1,000 to be applied towards principal only, then they will have to reduce the principal amount by 1,000, which could mean the equivalent of atleast 2 EMI payments (if it’s in the first 22 years of the 30 yr loan quoted above)

Hope this clarifies things.

Update: This is not valid in India, sorry

@NewUser123, it is a bit different in banks. There are 2 issues here. first, when u prepay, it is credited to the account straightaway. Interest will reduce from that date onwards. No change in subsequent EMI. Second is, if you want to reduce your EMI from next month, u have to apply for rephasement, bank recalculates EMI and advise u. but this involves some charges. this can be done only once during the whole tenure of the loan. hope this clarifies things.

Yes. I agree. EMI is a fixed amount which is derived from principal plus interest amount and divided by tenor so that customer gets to pay one single instalment.

This is mainly for retail loans. If it was a corporate loan generally the repayment will be a fixed principal amount plus accrued interest as and when due. This means that the corporate every quarter pays 1000 plus whatever accrued interest during this quarter

So for a retail customer when he prepays say 50000 this amount gets credited to the loan account and interest amount after the credit will be on the reduced balance as interest rate on loans are charged on diminishing balance basis ie based on the outstanding loan balance at the close of business every single day.

However in the olden days banks used to charge fixed rate loans. This means say 5 percent is charged on one lack. Bank will add up 5000 to 100,000 and then divide 105,000 into say 12 months.

In such cases if u are charged fixed rate loans which are calculated upfront then you need to ask the bank to readjust and recompute when u prepay

I dont think these fixed rate personal loans still exist today. I am not sure

Sorry guys, then the info I mentioned is not applicable in India.

My info is from other countries ( I had worked in home finance, where such a request had to be honoured by law), mistakenly thought the same applied here too…

Just FYI, we had an old lady who used to just accumulate all spare change and send it to us with the principal only option :joy: sounds silly, but she cut years from her mortgage doing this simple thing.

Also, the EMI doesn’t need to change… one can recompute periods remaining given the new principal and the total payment amount…

Why do you want to pay off? Transfer it to sbi max gain loan and put whatever you have in max gain account. You won’t have any interest, and will have flexibility to take it out any time you want.

You can open an RD and keep saving some money through it. Select the RD for 1 or 2 years and it will also accumulate interest. Then when it matures you can put in the amount and decrease your liability. Doing this once or twice can significantly decrease the tenure of the loan.

I did the following to repay my home loan within 5 years:

  • I used the overdraft facility of my loan account to the fullest extent:
    a) Deposit 90-95% of the monthly income to the overdraft account
    b) Used credit wisely: paid as many household bills using two credit cards (with a 15-days apart billing cycle)
    c) Pay credit card bills from the overdraft loan account. Since interest was calculated on the daily closing balance, I saved a bit

  • Lead a simple lifestyle during the tenure of your loan
    a) Some people found it absurd that I didn’t do full-fledged interior furniture (did only kitchen and wardrobes in the bedroom). I even had a handmade shoe rack! But once the loan was cleared, only then did I spend on the interior.
    b) I kept a check on the lifestyle/discretionary expenditures

  • Maintain a cashbook
    a) I categorized the expenses. This is not to control spending but to understand where I spend the most and what to bring under control

  • My other choices - until the home loan was paid - were: (a) not to invest in other assets like mutual funds, etc., (b) not to go on very costly vacations, and (c) not to buy my first car