A home loan is a long-term financial deal and we must shell out a lot of money every month to keep the loan repayment process afloat. Repayment of home loans often spans into decades, sometimes twenty to thirty years, thus managing your monthly budget becomes crucial.
When you avail of a loan, you make a promise to pay an equated monthly instalment (EMI) to your lender before an agreed term every month. Every month a good fraction of your salary is absorbed by your EMI, leaving little room for other expenses and savings. Thorough research and awareness about the EMI could help us in managing our monthly budget efficiently.
Most people shy from availing of home loans because they believe that higher home loan EMI will exhaust all their monthly savings. However, careful planning and understanding of home loan EMI will help you manage your monthly budget effectively.
There are many ways and means to cut down your home loan EMIs. Various online financial tools, such as the home loan eligibility calculator, let you evaluate your monthly income against the loan amount you desire to undertake. By following a few important tips, you can easily reduce home loan EMI outgo.
Paying a Large down Payment Will Automatically Reduce Your EMI
Lenders readily agree to finance up to 80-90 percent of a property’s value, which means you just need to contribute 10-20 per cent as a down payment. However, this low down payment amount will have a toll on your EMI.
To avoid paying higher EMIs, you must try and arrange for a higher amount of down payment from your savings. The loan-to-value ratio will be lower if you shed a higher down payment for the same home loan.
Shuffle Your Interest Pricing Regime
If you are an existing loan borrower, then changing your pricing regime in due time will help to lower your EMIs. Banks often change the way they charge interest on loans with time, which may lead to fluctuations in the rate of interest by a nominal margin.
If you look at the past decade, the interest regime before July 2010 was Benchmark Prime Lending Rate (BPLR) on loan, which then changed to the base rate. Then in 2016, the floating rate on loans was based on Marginal Cost of Funds Based Lending Rate (MCFBLR), changing to External Benchmark Rate (EBR) in 2019. Shifting your interest regime per the market trend will lead to saving interest, and thereby help in lowering your EMI.
Initiating for Prepayment
Loan prepayment is another easy way you can use to reduce home loan EMI by a greater margin. If you have gained financially due to a pay bonus or other means, it is wise to partly or fully prepay the home loan. Doing this will let you reduce your principal amount, which will, in turn, lower your EMI burden to some extent if you keep the previous tenor.
Home Loan Balance Transfer
If your current home loan interest rate is higher , then it is advisable to transfer your existing loan to a lender who is offering a lower interest rate. Generally, banks charge a nominal fee for transferring your loan to a different lender.
You can use our online home loan EMI calculator to find out whether refinancing is a profitable deal, and what percentage of EMI will be lowered using the new interest rate on your home loan.
Revise your Interest Type
If you have opted for fixed interest on your home loan, then chances are you will be paying a higher interest rate on your home loan throughout the loan tenor. A floating interest type is typically lower by a significant margin from the fixed interest rate.
Compared to fixed interest rates, floating interest rates are at a record low during the current time, and smart borrowers will switch their interest type to the latter, either with their existing lender or by changing to another lender.
Choose a Longer Tenor
When you avail of a loan for a longer tenor, you get an extended period to repay the loan amount. This means that you must pay Rs.1645 less EMI if you repay an amount of Rs.10 lakh at 10 per cent interest in 25 years, then if the same amount is paid in 15 years.
Negotiate with Lenders
You should not shy away from negotiating with your lender for a reduction in the interest rate. Sometimes, lenders do not follow the government guidelines effectively, which might lead to a higher interest rate for your home loan.
Furthermore, in the case of new policy changes that are not in the lenders’ interest, lenders take time in implementing these policies. You must act vigilantly in case of a policy change and negotiate with the lender to make appropriate changes, as per the guidelines.
Repaying your loan is a daunting task, therefore keeping your EMI manageable is an important step for a seamless loan repayment process.