According to a report titled “How India Lends-FY21”, the mortgage portfolio increased 32% in value and 15% in volume between FY17 and FY21. Although the numbers confirm the popularity of this credit facility, individuals should establish a solid repayment plan in advance to clear the debt without difficulty.
They can also follow some helpful tips to reduce the burden of EMI home loans and plan their finances accordingly.
Top 5 Tips to Reduce the MIE Burden of Home Loans
The EMI home loan mainly depends on the loan corpus, the term and the interest rate. Therefore, it is essential to adjust these variables to achieve a workable IME. In this regard, borrowers can also use a real estate loan calculator, easily accessible online.
In addition, the following tips will also help them control their EMI home loan:
- Choose a longer tenor
The easiest way to reduce EMI for home loans is to select a longer term. Typically, the repayment term for a home loan can be up to 30 years. It offers great freedom to borrowers to repay debt comfortably. However, it should be remembered that if a longer duration reduces the EMI load, it increases the interest payable.
For clarity, let’s take an example.
Suppose an individual opts for a mortgage of Rs.40 lakh at a 7.5% home loan interest rate. If that person opts for a 20-year term, the EMI would be Rs 32,224, and the total interest payable would be Rs 37.33,622. If he reduces the term to 14 years, the EMI would be Rs. Rs. 38,526, but the interest outflow would be Rs. 24.72,295.
Hence, it is clear how a longer term helps reduce payable IMEs.
- Find the best interest rate
The interest rate on home loans is directly linked to EMI outflows. The higher the rates, the more expensive the EMI. The interest rate varies from lender to lender, so it is imperative that potential borrowers compare different rates before finalizing one.
Note that lenders offer an interest rate after assessing applicants’ mortgage eligibility. Therefore, meeting the lender’s own eligibility criteria also results in the most competitive interest rate.
Eligible applicants can also take advantage of Pradhan Mantri Awas Yojana or PMAY to save on interest payable. Beneficiaries of this scheme can benefit from the PMAY subsidy on the interest rate and maximize savings.
However, individuals must meet most of the eligibility parameters and have their name posted on the PMAY list from time to time.
- Go higher advance payment
Otherwise directly, the down payment also plays a vital role in determining the EMI of the home loan. Typically, lenders offer an LTV of up to 90% for a home loan. Hence, the borrowers have to pay the rest of the down payment amount.
For example, the price of the property is Rs. 1 crore, and if the LTV is 75%, the maximum loan amount that can be claimed is Rs. 75 lakh. So, for the rest of Rs.25 lakh, you have to make a down payment.
Now, if an individual makes a larger down payment, they have to borrow less and the EMI will decrease given the lower loan corpus.
So, if you can afford it, making a substantial down payment can significantly reduce your monthly payments.
- Opt for a mortgage balance transfer
Existing home loan borrowers who pay higher interest rates can transfer the outstanding balance to a new lender offering lower rates. Besides the interest expense, it also helps to reduce the EMI burden. However, individuals should know the right time to opt for this facility in order to maximize the savings before opting for it.
They should also consider the cost of the balance transfer and make sure that it does not consume the amount saved. In addition, lenders often also provide top-up loans during the balance transfer. Since this fund is not subject to any end use restrictions, borrowers can use it for various purposes.
Existing borrowers can also benefit from extended pre-approved offers from selected financial institutions. These offers help to make loan processing hassle free and fast. Besides home loans, these are also available for loan against property. Enter your name and phone number to verify your pre-approved offer.
- Regularly make a partial prepayment
If the pocket allows, it is wiser to make a partial prepayment from time to time. With this ease, individuals can either reduce the duration or settle for lower monthly payments.
Individuals can use festival bonuses, incentives and maturity amount earned from investments etc. for partial prepayment purposes. Some financial institutions also provide a partial prepayment calculator for a home loan that helps borrowers estimate the total savings on the amount of interest.
So, these are the 5 best ways to reduce EMI on home loans and make room for other liabilities. However, individuals should also take into account the additional fees that lenders charge if any. It also affects the total cost of borrowing.
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