Sure Ways to Reduce the Burden of Your Mortgage Loan

Today, you can avail various types of loans for varying circumstances and different reasons. Knowing which loan to apply for and for what purpose will help you in making the most out of it. However, the two loans that generally confuse people are home loans and mortgage loans. So, before we start talking about how to reduce the loan amount, let us understand the basic difference between these two types of loans and find out whether or not the latter can be converted into a home loan.
 

Difference between home and mortgage loans

 
A home loan is taken to buy or construct a new house when the loan applicant does not own a property. This loan can only be used for the construction of a new house or to buy a ready to move in property.

On the other hand, a mortgage loan is available to those who own a property that can be used as security. It is also known as a loan against property. There is no restriction on how a mortgage loan can be used. It can be used to meet personal and/or business requirements.
 
ALSO READ: Beginner’s Guide For Taking A Loan Against Property

Converting a mortgage loan into a home loan is not possible

There are many reasons why people look for options to convert their existing mortgage loans. For example, the EMI that they have to pay may not fit their budget anymore or they might find another loan scheme better.
 
Since mortgage loans are availed by people who are in urgent need of money, the interest rate on these loans is higher than that on a home loan. This is because the risk factor of the lender increases in the case of a mortgage loan, as they may face difficulties while trying to sell or recover the asset. Under normal circumstances, it is not possible to convert a mortgage loan into a home loan as the conditions for lending and the nature of the loans are different. But that does not mean you have no hope.
 

Effective ways to reduce the burden of a mortgage loan

There are many ways in which you can reduce the burden of a mortgage loan. Since the overall cost of this loan depends on the interest charged by the lender, you can:
 

• Increase the EMI you are paying

If you are wondering how to clear loans faster in India, simply increase your EMI. At the end of the year, everyone usually gets a pay raise. If you own a company, you must have set a goal to multiply your earnings every year.
 
Let's say your income grows by 15%. Then, you can easily raise your EMI by 10%. Depending on your income, you may choose to increase your EMI by Rs 3,000 to Rs 4,000 every year.
 

• Use your investments

When you are in a financial bind, investment dividends are the best option. If you believe you will have difficulty repaying your debts in the future, consider investment payouts to reduce your debt burden. To pay off the majority of your debt, you can use your mutual fund investment or the proceeds from the maturity of your bonds.
 
If the interest rate on your mortgage loan is expensive, consider borrowing against your PPF and life insurance plans. PPF interest rates are usually 2% greater than the rate of return on the same investment scheme.
 
Investment utilisation is the answer to the most common query, "how to reduce EMI of an existing loan?"
 

• Renegotiate the loan terms

Renegotiation refers to a situation in which you request a lower interest rate from a lender based on your improved profile. If you have an ordinary credit score and income at the time of borrowing, but both have substantially improved over time, you can take advantage of it. Although the chances of your lender lowering your rate are modest, it's never a bad idea to ask. 
 

• Consider prepaying the loan amount 

Remember, the higher the loan amount the longer the repayment term, which means a higher amount of interest for you to pay. 
 
Assume you have taken a mortgage loan of Rs 50 lakh with a 15-year term and a 9% interest rate. In this case, the total interest payable would be Rs 41,28,399. If the same loan is taken for 10 years, the interest payable drops to Rs 26,00,546. 
Prepayment is the best option to save on interest and lower your EMI to a great extent. But before using this option, you must check with your lender about prepayment fees.
 

• Go for the balance transfer option

In addition to the above-mentioned options, if a customer is unable to bear the burden of a mortgage loan, he or she can also go for the balance transfer option. Under this, you can transfer the loan amount to a financial institution that offers better interest rates and a longer tenure for repayment of the loan. To initiate the balance transfer option, certain lenders require customers to have a minimum balance. Another condition is that the borrower must have a good credit score and he or she should have paid back the previous payments. The borrower must also have paid 12 prior repayments on time.
 
ALSO READ: 3 Strategies to Help You Pay Off Your Mortgage More Quickly
 

• Be aware of the conditions 

You should be aware of the conditions when you transfer the loan amount to another financial institution. Make sure that the interest rate offered by the lender on the loan is lower than that being charged by the current one. You should also be aware of the pre-closure penalties of the existing loan and processing fees for the new one. If you are not careful while switching the loan, it might cost you the same.
 
In addition to the above pointers, you may also consider taking a top-up from your lender, which will be higher than the interest rate charged for a home loan, but lower than that for a mortgage loan.

ALSO READ: Points To Consider Before Taking A Loan 
 

Conclusion

A mortgage loan is expensive, and if it becomes too much for you, you can adopt the above-mentioned measures to reduce the burden. This way, you can easily manage your loan repayment.
 

Disclaimer: This post was first published on 26 November 2020 and has been updated for the latest information, freshness, and accuracy.