September 22, 2021

How to Reduce Home Loan Burden with an Annual Bonus?

May 26, 2021

If you have availed a home loan, you must keep up with regular EMI payments to avoid home loan default. However, at times, managing monthly expenses and paying home loan EMI can be financially straining. The situation could get even more critical if you are the sole earning member of the family. Thus, whenever an opportunity arises, you must try to reduce your home loan repayment burden. Ahead, we have elaborated on how you can make use of the annual bonus to save on your EMI outflow and make repayment easier.

Using an Annual Bonus for Making Part-Prepayment of Home Loan

Your annual bonus is no less than a blessing in case you are finding it difficult to pay home loan EMIs regularly. Therefore, use your annual bonus wisely rather than spending it impulsively on an exotic vacation or an expensive purchase.

Use your annual bonus for paying an extra EMI every year or making a part-payment of your home loan. This will help you close your debt sooner by reducing the loan tenure. By prepaying your home loan, you can also opt to reduce your monthly instalment. This will decrease the chances of home loan default. You can save on the interest pay-out by repaying your home loan sooner than the specified tenure. Also, timely repayment will boost your creditworthiness, thereby making you eligible for attractive loan offers in the future.

Before using your annual bonus for home loan prepayment, ensure to make a note of the prepayment charges levied by the lender.

Learn about home loan prepayment with the help of an example:

Suppose you have taken a home loan of Rs 50 lakhs at a rate of 8.5% for 20 years. By using a home loan EMI calculator, you can easily get an estimate of your monthly instalment, which would be Rs 43,391.

Now, consider that you utilize your annual bonus and surplus income to make a part-prepayment of Rs 2 lakhs. With the help of a home loan prepayment calculator, you can easily calculate your revised EMI. You must enter the details such as the loan amount, tenure, interest rate, and the prepayment amount in the calculator. For a part-prepayment of Rs 2 lakhs, your revised EMI will be Rs 41,656. This would mean a reduction of Rs 1735 or 4% EMI savings.

However, if you wish to close your home loan sooner, you can keep your EMI at Rs. 43,391 and reduce the loan tenure.

You must not default on your home loan under any circumstances. This is because a home loan is a secured loan, and thus, in case of a default, the lender reserves the right to seize your property to recover its losses. Therefore, make sure that your home loan EMIs are always affordable. The longer the loan tenure, the lower will be your home loan EMI. Whereas, for short-term home loans, EMIs will be comparatively higher. However, the good thing is that you will be able to bring down the overall cost of borrowing by opting for a short-term home loan.

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