Tuesday, 29 September 2020

Tips On How To Reduce Your Existing Home Loan EMI

People who are already repaying a home loan would most likely have their home loan EMIs as their biggest monthly expense. In the majority of cases, the home loan EMI constitutes 30% to 40% of the entire take-home income of such households.

And it’s also true that after paying the EMI, these households aren’t often left with much to take care of their other important needs, let alone save for the future. It’s for all such people buried under a hefty home loan interest rate that we are offering some workable tips to reduce your existing home loan EMI.

Reduce Your Existing Home Loan EMI

Pay something extra at least once every year

All lending establishments, including banks and NBFCs, allow home loan borrowers to make partial payments from time to time. In fact, you are allowed to make 2 to 3 such partial payments each year (the exact number may vary from lender to lender). The majority of these lending establishments allow part prepayments of a minimum ₹ 10,000, going up to any sum, depending upon the loan amount and the lender’s policy. You should try repaying a good part of your home loan at least once every year. 

Making such partial payments will enable you to pay off the outstanding principal much quicker and also reduce the total interest payments. As a result, you’ll be able to either reduce your home loan EMI each month or reduce the overall repayment tenure.

Refinance by opting for a different lender

If you believe that your home loan interest rate is higher than normal, you can always opt for refinancing. Banks do interest rate calculation based on something called MCLR (Marginal Cost of Funds based Lending Rate), which can vary from bank to bank. Hence, you can always switch to a different lender that offers a better interest rate.

As per the MCLR regime, banks are given freedom by the RBI to decide their own MCLR, based on their cost of raising fresh funds. As a result, if a bank raises the MCLR during the tenure of a home loan which was taken on the floating interest rate, the new interest rate will become applicable to that home loan too.

Negotiate a better deal with the present lender

If you have been making your EMI payments on time and enjoy a good rapport with the present lender, there is always a chance to negotiate better terms with the current loan provider. Hence, you may be able to avail of a better interest rate with a little persuasion.

Please note, many times banks avoid passing information on base rate cuts to their existing home loan customers. They continue charging them the same interest rate, and offer lower home loan interest rates to only new clients. In case you had opted for a fixed rate arrangement, you won’t be able to make any changes to the interest rate over the loan’s tenure. However, if the loan was taken at a floating interest rate, and the bank hasn’t changed the interest rate applicable to your loan product, you can always ask them for a reduction, as per the latest guidelines and lending rates.

Rather than having to ask for a reduction in the home loan interest rate at a later time, you should opt for a good home loan deal right at the beginning itself. One of the ways to do that is by comparing home loan offers from different banks and NBFCs.

Use Windfall gains to repay costly debt

Received a fat bonus? Do not splurge on the latest smartphone or newest plasma TV. Use the money to pay down your debt aggressively. Windfall gains, such as income tax refunds, maturity proceeds from life insurance policies and bonds, should be used to pay costly loans like credit card debt or personal loans. “Use a part of any bonus or proceeds from asset sales to bring down your costlier debt as much as possible,” says Suresh Sadagopan, Founder, Ladder 7 Financial Services. However, remember that the lender may levy a prepayment penalty of up to 2% of the outstanding loan amount. While the RBI does not allow banks to levy a prepayment penalty on housing loans with floating rate interest, many banks do so for fixed-rate home loans. Lending institutions normally do not charge any prepayment penalty if the amount paid does not exceed 25% of the outstanding loan at the beginning of the year. If you are likely to incur a penalty, compare the cost with the interest saved if you prepay the loan.

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