Whenever you take a home loan, the interest rate payable on it and the tenure of the loan are the main determinants of the amount of equated monthly installment (EMI) you have to pay. Here are some ways how a new or an existing home loan borrower can reduce the EMI burden of their home loan efficiently.
A. New home loan borrowers
To reduce your home loan EMI, the first thing you should do is to choose a lender which offers home loan at a lower rate of interest. However, exploring how you can take a home loan, and from which lender, can be a daunting task. Also, at times you might not be able to figure out which lender is offering a better home loan deal. Here are a few tips which can help you get a good deal on home loans and which in turn can help you in reducing your EMI payments.
1. Compare rates online
Nowadays, one of the best ways for home loan borrowers to check home loan offers is to go online. There are various websites, online portals which give summarised view of the rates of interest, fee and other charges of different lenders. Hence, before availing a home loan do your research to ensure you get the best deal.
2. Opt for longer repayment tenure on your loan
The longer the tenure, the lower will be your EMI payable every month. However, you should only opt for longer loan repayment tenures if you think you cannot afford to pay higher EMIs. When you opt for a longer tenure, you end up paying more interest on your home loan outstanding amount. One should always calculate the tenure and corresponding interest rate options available to you before opting for a home loan.
Try to maximize your EMI payments but not more than what you can comfortably pay every month. So, choose the home loan tenure carefully as this impacts the amount of EMI you will have to pay every month. In the initial years, your disposable income will get squeezed in order to pay off higher EMIs. However, as time passes this EMI amount will get easier for you to pay, as normally a person's income increases with time as he/she progresses in career.
3. Make a bigger down payment
As home loan lenders are allowed to finance up to 80-90 percent of the property's value, those looking to avail a home loan have to contribute a minimum of 10-20 percent as a down payment. However, instead of arranging just the minimum down payment, it would be prudent to provide a higher contribution from your own pocket.
The higher you contribute as down payment, the lower your LTV ratio (The Loan-To-Value ratio means the ratio of a loan to the value of the property purchased) and loan amount required would be, which in turn enhances your loan eligibility and increases the chances of loan approval. But while trying to make a higher down payment, make sure you don't overstretch your finances or hinder the achievement of other important goals.
B. Existing home loan borrowers
If you are an existing home loan borrower and looking for better interest rates in order to reduce your EMI payments, then also you can adopt certain strategies to lower your home loan EMI and reduce the debt burden.
1. Refinance the loan by changing your lender
If you think you have taken a loan at a high-interest rate, you always have an option to refinance it. Banks normally offers interest rate based on the MCLR (Marginal Cost of Funds based Lending Rate) regime which differs from lender to lender. In such a scenario, you can switch to another lender offering better rates.
In the MCLR regime, the Reserve Bank of India's (RBI) allows banks to set their own MCLR based on their marginal cost of funds (which means the cost of raising new funds for the bank). In this regime, the pre-fixed loan reset dates ensure that changes in lending rate (MCLR) during the loan tenure get transmitted to the home loan borrower once the loan's reset date arrives which depends on the existing rate on that date.
2. Negotiate the service terms with an existing lender
If you have maintained a good relationship with your existing lender, you can negotiate the service terms of the home loan. This way you may be able to procure lower interest rates on your loan amount.
3. Make home loan prepayment from time to time
If you have a surplus amount left at your bank, you should try to make pre-payments for your home loan before the end of its tenure as doing it can reduce the overall interest payments. You may get this surplus amount from your annual bonuses, any maturity proceeds from investments made earlier, etc.
Prepaying some of your loans will reduce the total loan outstanding and therefore, the total interest payable. Consequently, either your EMI amount can be reduced or the tenure of repayment. Generally, lenders allow you to prepay your outstanding home loan balance either in parts or fully. If you prepay some of your loan you can lower your EMI payments by negotiating with the lender where you must ask the lender not to reduce the total loan repayment tenure and instead reduce your EMI amount.
News Source: Economic Times, Url: https://bit.ly/2m1SJUY