For those who have already taken the home loan, it is one of the biggest monthly expense in their monthly budget. It consumes 30-40% of the total amount in general cases. After paying the bulky EMIs, you are left with nothing more than peanuts to save for your future as you have blocked a fixed amount from your monthly income to repay your home loan, which you can’t use for your other needs and financial liabilities. So, here are some of the tips to reduce the EMI on a home loan.
Tips to reduce Home Loan EMI
Generally, to reduce your financial burden you opt for longer tenure to make EMIs fit into your monthly budget. At this stage, most of the people don’t even realize that if they increase their tenure and choose the lowest EMIs they end up paying more amount as interest. For example:
Loan amount: ₹30 lakhs
Rate of interest: 8.35% per annum
|Category||10 years||20 years||30 years|
|Monthly EMIs||INR 36,955||INR 25,751||INR 22,749|
|Total interest paid||INR 14,34,656||INR 31,80,141||INR 51,89,729|
|Total amount paid||INR 44,34,656||INR 61,80,141||INR 81,89,729|
With the above example it is clearly indicated that if you choose longer tenure you will pay more money as interest and if you choose the shorter tenure you will be paying higher EMIs, but your total amount paid as interest will be lesser. You can also check your home loan EMI for different loan amounts with the help of the calculator. Here are some useful tips to reduce the burden of your monthly EMIs.
Pay extra amount at least once in a year
All banks allow you to make partial payments. You can make two-three partial payments in a year. However, the number of partial payments may vary from bank-to-bank. Some banks allow one or two partial payments and some allow you even more than that. The minimum amount accepted by most of the banks is Rs. 10,000. You should try to make at least one or two partial payments in a financial year. The partial payment will help in reaching the principal amount faster and lower the financial burden.
Increase the amount of EMIs yearly
If you have availed the loan on floating rate of interest, various banks give you the option to choose to increase EMIs. This is considered with the future growth in your annual income. You can select the option of choosing 5% growth in the EMIs on yearly bases in respect to the growth of your salary. It will help you in paying your loan faster as compared to the normal term and EMI system.
Apply both above options
If you will apply both options at the same time, i.e. increase in the EMIs on yearly basis and pay an additional EMIs or extra amount towards EMIs. With, these useful measures you will end up paying your loan faster as compared to general term.
Renegotiate the rate of interest
At times many banks don’t pass the information on lower rate of interest or cut-down in the base rates to the existing customers. They keep on charging the same rate of interest to the existing customers and offer a lower rate of interest to new customers to lure them. If you have opted for a fixed rate of interest from the bank in that condition your rate of interest will remain same for the whole tenure. But, if you have taken the loan on floating rate of interest and your bank has not changed the rate of interest with context to the latest changes done by RBI, you can ask your bank to reduce the rate of interest as per the latest rates and guidelines.
You have read the simple tips that can help you reduce your EMI on a home loan. Now, to help you understand the functioning, we have brought in some of the factors that affect your home loan EMI which you should know.
5 Factors that affect Home Loan EMI
An EMI is directly dependent on the overall profile of the borrower and the property for which the loan is being taken. Thus, it becomes important for a borrower to know the factors that affect the home loan EMI so that he can choose the best lender. So, have a look at these factors below:
Rate of Interest
The interest rate on a loan has a direct impact on the EMI. Especially, if the loan is taken with floating rate of interest, the EMI will be changing as the prevalent lending rates in the market. However, choosing a floating rate of interest does not mean that it is risky as presently the rate cuts by RBI has resulted in the lowest home loan interest rates of 8.35% per annum at top banks. Also, even if the rate on your loan is fixed, it does not remain fixed for the entire tenure so there is no harm in that as well. But, one advantage of a floating rate is that there are no prepayment charges which makes it easier for you to close your loan anytime without any additional penalties.
Generally, a home loan is taken for the tenure ranging from 10 to 30 years. The interest rate, the loan amount and the tenure altogether decide the EMI and the longer the tenure is, the lower will be your EMI. However, it is totally dependent on the borrower on the tenure he chooses as EMI must be within the budget as you can not change your EMI in between the loan. So, it is better you choose the tenure that can result in the EMI that you can pay for the whole time.
Since home loans is a financial liability for many years, a borrower always looks for the time when he can prepay the principal amount and free himself from the EMI burden. Although, if your loan is on a floating rate, you can go for prepayment without any additional charges. But, if your loan is based on a fixed rate of interest, you will have to pay a prepayment charge which is usually between 1 to 5% of the principal amount.
Step-Up or Step-Down Repayment
Step-Up repayment is the facility wherein the EMI increases with time. It is often chosen by the borrowers who are in their initial phase of earning as their salary is expected to rise with time. Step-Down, on the other hand, is the option wherein the EMIs will reduce with the time and is beneficial for those who are close to their retirement.
Transferring the home loan is advantageous for those who are presently paying a higher EMI. For instance, if you have an existing home loan on a 10% per annum rate of interest, you can balance transfer your loan to another lender and pay a much lower EMI. At present, the lowest rate of interest is 8.35% per annum which is offered by top banks like SBI, HDFC, Axis, LIC and ICICI Bank. So, a balance transfer can surely help you save a lot on the repayment by paying the EMI that is in your budget.
You can also check your CIBIL score online for free as it can help you get a lower rate from the lender. Wishfin is an authorized platform to check your CIBIL score by PAN card and get the credit report on your registered email ID.