Home loan interest rates have touched historic lows in recent times. This has made home loans cheaper. With the ongoing economic uncertainty linked to Covid-19, many are looking to have more disposable income. One way to improve your disposable income is by having smaller EMIs. In this article, we take a look at a few tips for both new and existing borrowers that may help ease their EMI burden.
For New Borrowers
If you are a new borrower and availing a loan for the first time, here are some ways to get the desirable EMI.
Get The Lowest Interest Rates: Loan interest rates impact your EMIs. The lower the rate, the smaller the EMI. The loan marketplace is full of options, and you can choose lenders with lower interest rates. For example, if you’re borrowing Rs. 50 lakh for 20 years at 8.5%, your EMI is Rs. 43,391. But another lender may be willing to give you the same loan at 7%, where your EMI will be Rs. 38,765. Therefore, go online to compare the rates on loans you’re eligible for. Interest rates are impacted by such parameters as your gender, income, credit score, loan-to-value ratio, and size of the loan. To illustrate the point…
Choose A Longer Loan Tenure: The longer your loan tenure, the smaller your EMI. For example, if you borrow Rs. 25 lakh at 7% for 20 years, your EMI is Rs. 19,382. But if you take the same loan for 30 years, your EMI is Rs. 16,633. However, the longer the tenure, the more your interest. In the first option, your interest is Rs. 21.51 lakh over 20 years. In the second, it’s Rs. 34.87 lakh. Therefore, optimise your loan tenure to get an affordable EMI as well as low interest. Despite the long tenure, borrowers can also choose to pre-pay on their loans, which will reduce their overall interest. This will help them become debt-free faster.
Higher Down Payment: When you take a home loan, you may typically get 80% of the property value as loan. This is also called the loan-to-value ratio. The rest — the down payment — needs to be paid out of pocket by you. The more you borrow, the bigger your EMIs. Therefore, for smaller EMIs, try to borrow less and pay more upfront.
For Existing Borrowers
An existing borrower can also reduce his home loan EMIs by opting for any of these ways mentioned below.
Refinancing Your Loan
If you are servicing a loan with an interest rate higher than the lowest rates being advertised in the loan market, consider refinancing your loan. This can be done in two ways. One – you can pay your lender a conversion fee to move you to a lower interest rate. If your loan is with a bank, this conversion usually moves you to the latest interest rate benchmark where the rates are lower. Two – you can do a loan balance transfer to another lender providing you with a lower rate. Both options need to be availed after examining the costs of refinancing.
It is important to note here that the Reserve Bank of India (RBI) has made it mandatory for commercial banks to link their interest rates with external benchmarks such as the repo rate. With the RBI announcing steep cuts in the key policy rates in the past few months, switching from a marginal cost of funds-based lending rate (MCLR) loan or a base lending rate (BLR) loan to a repo-linked loan could bring your EMIs down. That being said, the interest rate of a repo-linked loan will increase whenever the RBI decides to hike the repo rate.
Pre-payments to home loans are adjusted against the principal balance. Each pre-payment can, therefore, accelerate your loan payment by either making your EMIs smaller or your loan tenure smaller. For example, if you borrow Rs. 25 lakh at 8% for 20 years, your total interest is Rs. 25.18 lakh. But if you pre-pay 5% of your loan (Rs. 1.25 lakh) at the start of every year (once every 12th EMI), your loan will be paid off in 120 months instead of 240, and your interest will be only Rs. 11.46 lakh.
Another crucial consideration to lower your home loan EMIs should be your credit score. The repo-linked home loans are calibrated according to the borrower’s credit profile wherein higher the credit score, lower will be the interest rate and vice versa. So, you must check your credit score before applying for a loan, and take corrective measures like clearing all your existing dues in full on time if it’s lower than 750 to get the best loan offers. This way you’ll avoid paying an additional risk spread which will increase your EMIs. Not just that, you should also check your credit score regularly as any substantial dip could trigger a hike in your EMIs anytime during the loan tenure.
Buying a house on loan is a long term commitment as the EMI will be serviced by you for a long period. You can effectively manage your EMIs by being on the lowest available interest rates, having a low loan-to-value, pre-paying regularly, and refinancing the loan when necessary.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.
Need help in calculating your EMI? Use BankBazaar’s easy home loan EMI calculator.