Ways to Repay Mortgage Loan Quickly
09 Feb 2022
Table of Content
Many people confuse home loans with mortgage loans. However, there is a major difference between the two. While a home loan is a secured loan that is obtained to purchase a property by offering it as collateral, a mortgage loan has no restrictions on the usage of the loan amount. It can be used to finance businesses as well as personal needs except speculation A mortgage loan is a loan that is taken by keeping your property as collateral. Mortgage loans are easier to get approval on since the lender gets to keep collateral as assurance of debt repayment. Till the time your debt is not repaid in full, you cannot sell the property placed as collateral for the mortgage loan. Hence, many people try to make quicker mortgage repayments to get back complete control of their finances as soon as possible.
Before you apply for a mortgage loan, it is better to get a fresh understanding of your finances and compare your monthly budget against your monthly EMI. This will help you calculate how much extra money you can allocate each month towards payment of your mortgage loan. Once you have your numbers in place, you can make plans to pre-pay your debt swiftly. To help you with some mortgage advice, here are three methods by which you can pay off your mortgage loan quickly.
Make extra payments whenever possible
To clear off your loan before its scheduled termination date, it is essential to make extra payments to the lender. These are instalments you pay to the lender other than your monthly EMI. Do check with your lender if they charge any fee for making an extra loan repayment and plan your instalments accordingly. You can make an extra payment whenever you like. However, it is better to plan these payments and either pay them quarterly, twice a year, or annually. The additional payment can be made using your savings, tax rebates, bonuses, or capital gains from investments, among many other options. Making extra payments will shorten the tenure of your mortgage loan and help you save a significant amount of money on your loan interest. Just ensure that these extra payments are affordable and do not eat into other expenses you have.
Select a higher monthly EMI
Selecting a higher monthly instalment is the fastest way to pay off a loan. A high monthly EMI will help you shorten your loan tenure quite significantly. Lenders providing mortgage loans can charge a floating interest rate or a fixed interest rate on your debt. If you have a mortgage loan that charges you a fixed interest rate, you may need to pay the penalty for the pre-payment of your debt. As a result, you may not want to make any extra payments on the loan. Thus, it is best to be calculative in your approach and select right EMIs beforehand. This will help you avoid any penalties you may need to pay for repaying your debt before its scheduled termination date.
On the other hand, if you have applied for a mortgage loan that charges you a floating interest rate, your monthly EMI may decrease if the running interest rate in the market falls. However, you should keep in mind to continue paying a high monthly EMI. This will help you significantly shorten the time taken to repay mortgage and help you save a lot of money on the interest you will owe.
Do not miss your monthly payments
It is important that you plan your monthly payments before you apply for a mortgage loan. This will help you avoid defaulting on your loan due to the insufficient availability of cash. Paying your monthly EMIs on time is crucial towards clearing off your debt quickly. This is because missing your scheduled payments can cause you to pay a penalty on the subsequent EMI payments and hence, increase the amount of your instalment. This may compel you to lengthen the tenure of your loan to be able to manage the expenses. Furthermore, missing your monthly EMI would also negatively affect your CIBIL score; this will make it difficult for you to procure other loans in the future.
Quick tip :You can also consider refinancing your mortgage loan in order to pay it off quickly.
Why should you repay your mortgage loan faster?
Settling a loan early is advantageous for you. A loan is a form of liability, and hence the pre-payment of loan helps you take better control of your finances. When you have no EMIs to pay, you can use your money for any other important expenses or goals. This would not possible if you have debt. You always need to track your expenses when you have a loan and make sure that no matter what, you have the EMI ready every month. Moreover, the EMI for a mortgage loan is usually of a high amount, and it can compel you to cut down on other monthly expenses. However, if you repay a mortgage loan faster, you can utilise your hard-earned money for other important goals and dreams, such as a holiday you have always wanted to go on.
Before you plan to pay off your mortgage loan early, do talk to a mortgage advisor. Ask them to clearly explain any penalties that may be involved. This way, you can compare the pre-payment penalties you would owe against what you would pay if you let the mortgage run its full tenure and take a good decision.
Points to consider:
If you are taking a mortgage loan for the first time, here are a few points to keep in mind:
Choose wisely between prepaying your loan and making an investment
Do not cross your financial limits only to pre-pay the loan. Keep your investment goals in mind when strategising the pre-payment of your mortgage loan. It is always better to check if it is more profitable to pre-pay the loan or invest the extra money and garner a larger financial corpus. Thus decision regarding pre-payment should be made only after assessing its opportunity cost.
Choose a shorter loan tenure but do not compromise on the repayments of other debts
It is better to select a shorter loan tenure only after carefully understanding your finances. You need to factor in the repayments of any other debt that you may have. It is better to pay off personal loan and other such debts that charge you a high-interest rate before pre-paying your mortgage loan. However, if choosing a shorter tenure for the repayment of your mortgage loan fits your budget, you can save a lot of money on the interest.
Get a mortgage loan at an interest rate is comfortable for you
It is important to choose the right lender who offers you an interest rate that is suitable to your budget. Hence, do your research and find the lender that charges you the type of interest rate (fixed or floating) that you prefer. Choosing a lender that charges a low interest will also help you reduce your EMI.
- Clearing up your mortgage loan before its scheduled termination can help you reduce your interest and give you peace of mind.
- You can clear off your debt quickly by asking the lender to refinance your loan to a shorter tenure.
- Choosing a higher monthly EMI instalment can help you shorten your mortgage loan tenure and reduce your interest.
- Make extra payments whenever possible to boost the repayment of your loan.
- Do not go out of your comfort zone to pay loan faster. You should consider paying off other debts that charge you a higher interest rate before you decide to start pre-paying your mortgage loan.
A Complete Guide to Personal Loan
A personal loan does not require the borrower to provide collateral and so it is an unsecured loan. The purpose or intention of a personal loan is to fund immediate financial contingencies. It could be for business capital, marriage, medical expenses or even foreign trips, though the end use of the capital really depends on the borrower, as long as it is for a legitimate financial need.
Eligibility for a personal loan?
Since these loans are unsecured- at what rate of interest you will get the loan and how much, whether or not you will get the loan-depend on the credit quality of the borrower. If you have good creditworthiness, you are likely to get the loan at an attractive rate of interest. If you have been a long time customer with the bank, with sound track record of financial discipline, you may also get a pre-approved personal loan sanction.
Bank of Baroda lists the following types of employees/self-employed individuals who are eligible for personal loans.
Employees of Central / State Govt. / Autonomous Bodies/ Public / Joint Sector Undertakings, Public Limited Co. / MNCs & Educational Institutions – with minimum continuous service for 1 year
Employees of Proprietorship, Partnership firms, Private Limited companies, Trust - with minimum continuous service for 1 year
Insurance Agents- doing business for minimum last -2- years
Self Employed Professionals (Doctor, Engineer, Architect, Interior Designers, Tech. and Management Consultants, Practicing Company secretaries etc) -- with minimum 1 year stable business.
Self Employed Business persons - with minimum 1 year stable business.
Some of the benefits of a personal loan are
Urgent financial requirement
If there is an immediate need for money, personal loans are the best option. They are considered better than credit cards or loans from family members or unorganized lenders, since the rate of interest is reasonable and the lender is a credible organization. Credit cards come with strict credit limits, which is not the case with personal loans. Funds taken from the bank as personal loan also resolve the issue of certain vendors not accepting payment through credit cards.
Breathing time for repayment
Also, the credit card bills need to be paid off by the due date which generally falls in the next month whereas you get some breather in repaying a personal loan EMI over a period of time, generally ranging from 3-4 years.
Flexibility of use
Funds from a personal loan are flexible in the way you use them. They can be used for several purposes- home renovation, travel, wedding and medical expenses or for any other purpose as per one’s personal obligations..
The loan amount you can borrow under a personal loan is also significant. For example, with Bank of Baroda offer personal loan amounts based on the eligibility of applicants
Personal loans may also be private loans since these loans are often used to meet cash requirements or personal contingencies and thus kept private to a great extent.
Flexible repayment structure
These loans are generally of the nature of short to medium term loans and come with a flexible repayment structure.
Easy to get
For example, Bank of Baroda is popular for personal loans that are quick to get, fast processing, minimal documentation required and offered at attractive rate of interests. Most salaried persons, self-employed and professionals can apply for these personal loans.
Smart Ways to Calculate EMI on Personal Loan
A personal loan does not require the borrower to provide collateral and so it is an unsecured loan. Since these are unsecured loans, the rate of interest on these loans are believed to be quite higher than all other types of loans. The purpose or intention of a personal loan is to fund immediate financial contingencies. It could either be for business capital, marriage, education or even foreign trips, though the end use of the loan really depends on the borrower, as long as it is for a legitimate financial need.
Before you apply for a Personal Loan, you may want to get down to the basics, to shop for the best offers on personal loans in the market. Among the most popular ones is the Bank of Baroda’s Personal loan product which apart from having the pedigree of belonging to one of the oldest and largest Indian banks, comes replete with some amazing features like flexible repayment options, affordable EMIs (Equated Monthly Instalments) that sit easy on your pocket and sizable loan amount among others in the category of personal loans.
Calculating the EMI on personal loans
The EMI calculations mainly rely on three variables- the loan term or the tenure of the loan, the loan value and the rate of interest. The rate of interest is one of the aspects that comes determined by the bank.
Calculating using the PMT formula
This is a longer, tedious and round about approach to calculating the EMI on your personal loan. Here, you can run the PMT formula on Microsoft Excel to calculate the EMI, where
PMT is your EMI,
NPER or number of periods is the total number of payments for the loan
PV is the loan value or the principal
Rate is the rate of interest/12
The formula is
PMT (Rate, NPER, pv).
You can keep trying the formula for various combinations and then choose the one with the lowest EMI, though this is a roundabout approach that could be prone to human error.
Online EMI Calculator
Or a far easier option to calculate the affordable EMI, is using, for example, Bank of Baroda’s online personal loan EMI calculator.
Here, you will find a slider on the range of each of the three basic variables on your screen- the loan amount you are likely to need, the tenure or the repayment period of the loan that suits your finances and the rate of interest.
Now, the rate of interest is what you get from the bank, while the other two aspects, i.e., the loan amount and the tenure of the loan are the ones you can play around with here.
When you place the cursor on a particular value of the loan term, rate of interest and loan amount, the calculator throws up a monthly payment value, which is your EMI. You can move the cursor horizontally along the range provided to pick the various values.
Here’s why using a Bank of Baroda personal loan EMI calculator works.
If EMI is too high
You can pick a longer loan term or
You can make the loan amount smaller.
If you find the EMI is affordable or even lower than ideal then you can plan to repay faster by either
Taking a larger loan value or
A shorter loan term.