Paying off a home loan is a major financial goal for many homeowners, and it can provide a sense of security and freedom. However, paying off a mortgage faster than the scheduled payment plan can be a daunting task, especially if you have a significant amount of debt remaining. In this blog post, we will explore some of the reasons why I have decided to pay off my home loan even faster than planned, despite having a significant amount of savings.
High Interest Rates
One of the primary reasons why I have decided to pay off my home loan faster is because of the high interest rates on the loan. My home loan currently carries an interest rate of 9.55%, which is significantly higher than the average rate of return on my investments. By paying off the mortgage faster, I can reduce the amount of interest I pay and save thousands of rupees in the long run.
For instance, let’s say I have a remaining balance of INR 60L on my home loan with a remaining term of 17 years and an interest rate of 9.55%. If I continue to make the minimum monthly payments, I would end up paying over INR 72L in interest over the life of the loan. However, considering that my investments have only yielded an average return of 7% for the past 3-4 years, it makes sense for me to pay off my home loan faster. By making extra payments and paying off the loan in the next 2-3 months, I can save a significant amount of money on interest charges and also free up my cash flow for other investments or expenses.
In India, the interest rates on home loans are typically influenced by the Reserve Bank of India’s (RBI) monetary policy, as well as other economic factors such as inflation and market conditions.
As of April 2023, the interest rates on home loans in India are generally in the range of 7.5% to 10%. However, the actual interest rate on a particular home loan can vary depending on a number of factors, such as the borrower’s creditworthiness, loan amount, and repayment term.
In recent years, the RBI has taken steps to reduce interest rates in order to stimulate economic growth. For example, in 2020, the RBI reduced the repo rate (the rate at which it lends to banks) by 115 basis points to 4%, which led to a corresponding reduction in home loan interest rates. However, since then, the interest rates have been gradually increasing.
As of March 2023, some of the major banks in India have announced home loan interest rates in the range of 8.5% to 9.5%. For example, HDFC Bank is offering home loans at an interest rate of 8.75%, while State Bank of India (SBI) is offering home loans at an interest rate of 9.05%. However, some banks are also offering home loans at a higher rate of interest, such as ICICI Bank which is offering home loans at an interest rate of 10%.
Here are some news links about home loan interest rates in India:
It’s important to keep an eye on the interest rates on your home loan and compare them with other financial options available to you, such as investments or savings accounts. This can help you make an informed decision about whether to pay off your home loan faster or invest your resources elsewhere.
Lackluster Investment Performance
Another reason why I have decided to pay off my home loan faster is that my investments are not performing as well as expected. Despite my best efforts to invest in a diversified portfolio with an average rate of return of 7%, the current market conditions have not been favorable. This has led to lower returns on my investments and has made it difficult to achieve my financial goals.
By paying off my home loan faster, I can redirect my resources towards more profitable investments and increase my chances of achieving my financial goals. Additionally, paying off my mortgage can provide me with a sense of financial stability and security, especially during times of economic uncertainty.
Future Financial Flexibility
Finally, paying off my home loan faster can provide me with more financial flexibility in the future. Once my mortgage is paid off, I will no longer have to make monthly payments towards the loan, which will free up a significant amount of cash flow. This will allow me to redirect my resources towards other financial goals, such as retirement savings or travel.
Moreover, paying off my mortgage faster will also reduce my overall debt load, which can improve my credit score and make it easier to obtain credit in the future. This can be especially important if I decide to pursue other financial goals, such as starting a business or purchasing another investment property. I have been thinking of starting a business for a long time. I spoke about it in one of my previous blog post too that I was about to start. However, due to illness in my family, I couldn’t do that. Specially with the Home Loan taking away major portion of my salary.
Paying off a home loan faster can be a smart financial decision for many homeowners, especially those with high interest rates and lackluster investment performance. By paying off the mortgage faster, homeowners can save money on interest charges, achieve their financial goals faster, and gain more financial flexibility in the future. While it may require some sacrifice in the short term, the long-term financial benefits are well worth it.