The latest monetary policy meeting of the RBI witnessed no alteration to the current repo rate, which remained at 4%. To curb the effects of the economic slowdown, the RBI decided to reduce the repo rate by 40 bps in May 2020, bringing it down to its all-time low. The same resulted in a steady decline in the home loan interest rate. The resulting effects of this move could be the following –
- The Indian home loan market is on track to register a 22% CAGR growth between FY 2021 and 2026.
This move by the apex bank also brought good news for home loan borrowers, as they will now receive the benefits of lower interest rates.
Since home loan interest rates have a significant effect on housing loan repayments, any alteration to it has a considerable effect on the EMIs. Apart from this, borrowers can also take some necessary measures to reduce their home loan instalments purposefully.
Top 4 tips to Reduce Home Loan EMIs
Here are some notable tips to reduce the home loan EMIs –
Opt for a higher down payment
One of the easiest ways to reduce home loan EMIs is by opting for a higher down payment. Since the RBI mandates financial institutions to provide 75%-90% of the property value, homebuyers need to arrange the remaining from their own pockets.
However, a common trend here is that individuals opt for the minimum down payment option, whereas the opposite is more beneficial for them in the long run. A substantial down payment results in a lower loan amount, low-interest costs, and reduced EMIs. Additionally, a higher down payment is one of the factors that can affect the home loan eligibility of a borrower.
A pro tip, even though home loan tax benefits do not reduce the home loan EMI, one can claim income tax exemptions while filing an IT return.
2. Make regular part payments
A home loan instalment comprises two components, interest and principal. In the initial years of repayment, borrowers pay the lion’s share of their home loan interest, and the principal payment remains minimal.
Therefore, during this period, they can make regular part payments to reduce their home loan EMI principal outstanding. Resultantly, the interest payments also decrease, and so do the EMIs.
3. A longer tenor can help
Since home loan EMI depend on the repayment tenor, one can opt for a longer one to reduce his/her monthly instalments. For instance, if an individual has a total loan outstanding, i.e. principal of Rs.30 lakh, with a repayment schedule of 15 years, she needs to pay an home loan EMI of around Rs.26,965 per month at a 7% interest rate.
If the same borrower opts for a longer tenor of 20 years, her home loan instalments will reduce to around Rs.23,259.
Therefore, opting for a longer tenor is a convenient way to reduce home loan EMIs. Moreover, borrowers can use an online calculator to find their monthly instalments and enjoy the benefits of calculating EMIs before taking a home loan.
4. Opt for a home loan balance transfer
Since a longer tenor results in lower EMIs, it is a popular option for borrowers to lower the repayment burden. However, this process with the existing lender is known as loan restructuring, which may adversely affect a borrower’s credit score, his/her future loan eligibility.
Instead, one can opt for a home loan balance transfer to avail a lower home loan interest rate and better loan terms. These are the major reasons to choose a home loan balance transfer. Here is an example for better understanding –
Assuming that you have taken a housing loan of Rs.35 lakh at a 9.5% interest rate for 22 years, with an EMI of Rs.31,656. After regular repayment, currently, you have an outstanding of around Rs.30 lakh with 15 years left.
Now, if you opt for a balance transfer at 8.5%, your home loan EMI will come down to Rs.29,853, and if you increase the loan tenor, it will further go down.
Apart from these, individuals can also apply for a home loan through government-backed affordable housing schemes like PMAY. The interest subsidy available here reduces the EMI burden.
Nevertheless, before applying for home loans, borrowers should check for a lender that extends pre-approved offers. Such offers streamline the loan application process and save time. They are applicable to financial products like home loans, loan against property, etc. Borrowers can check their pre-approved offers by submitting their essential contact details.
Home loan interest rates have hit an all-time low, and currently, they are at sub 7%. However, these rates vary from one financial institution to another. Thus, it is better to compare them in advance to make an informed decision.