- Usually, individuals opt for refinancing when another financial institution offers lower home loan interest rates.
- Financial institutions often agree to lower interest rates if you are on good terms with it and boast of a robust repayment history and credit score.
- Most borrowers only pay the minimum amount required as a down payment.
The home loan segment clocked a growth rate of 17% YoY as of February 2020, according to the Reserve Bank of India. Housing credit has become a mainstay in the Indian financial sector over the past two decades. The primary reason behind this phenomenon is the disparity between burgeoning real estate prices and the median income of individuals in India.
The total outstanding balance in the housing loan segment is Rs.13.3 lakh crore, as of February 2020
This sector is estimated to post a CAGR of 22% from 2021 – 26
Nevertheless, a home loan is a significant financial commitment, owing to two factors – a prolonged tenor and substantial loan amount. These factors, coupled with home loan interest rate, leads to considerable EMI outgoes. This instalment burden may leave little financial leeway to borrowers.
Thus, here are some ways how you can reduce your home loan EMI burden:
Home loan balance transfer
In case you are already servicing a housing loan, you may opt for a loan balance transfer to truncate the interest outgo. It involves transferring the outstanding balance in your home loan account from one financial institution to another. Therein, a new lending institution settles the balance amount with your current lender. Following the transfer, you need to pay your EMIs to this new lender.
Usually, individuals opt for refinancing when another financial institution offers lower home loan interest rates. Since it’s a long-term, large-ticket credit facility, even a marginal reduction in interest rate can lead to considerable savings.
- As of December 2019, the number of active home loan accounts stood at 14.2 million.
- 20% – increase in home loan balance transfer, according to a recent financial report.
Considering financial benefits, borrowers should consider a balance transfer if the new interest rate is at least 0.5% less than the current rate. Since this transaction involves several charges and costs, this consideration is essential to reduce your EMIs with a home loan balance transfer effectively.
Moreover, you may want to take into account at which stage of repayment you are opting for a balance transfer. Typically, it is the most profitable during the first few years of repayment. You may use a loan EMI calculator to reckon whether a balance transfer will be advantageous in your current scenario.
Negotiate with the current lender
As an alternative to balance transfer, you may choose to negotiate with your existing lending institution. Financial institutions often agree to lower interest rates if you are on good terms with it and boast of a robust repayment history and credit score.
You may find this more convenient since a home loan balance transfer involves several formalities. Nevertheless, you should weigh your options and consider benefits on both sides before opting for either.
Higher down payment
In case you are a new borrower, you may consider opting for a substantial down payment. When you apply for a home loan, the lending institution provides a percentage of the property’s value, denoted by the loan-to-value ratio. You need to pay the remaining balance as a down payment.
Most borrowers only pay the minimum amount required as a down payment. However, by opting for a higher amount, you can reduce the loan quantum. It ensures lower home loan interest outgo, and resultantly, cost-effective EMIs.
You can also choose a more extended tenor to reduce your EMI burden. The repayment period is a crucial variable when computing instalments—a longer tenor results in smaller EMIs and vice versa.
Thus, you can reduce the EMI burden by opting for a prolonged tenor. However, note that the interest outgo increases if the repayment period is longer and vice versa. You might want to utilise a home loan EMI calculator to determine which repayment period will suit your financial standing.
Pay an extra EMI
An effective way to reduce your home loan burden is by paying an extra EMI every year. By doing so, you not only lower the principal amount but also regulate the home loan interest payable. Moreover, it shortens the repayment period. For instance, if you are servicing a loan with a tenor of 19 years, with an extra instalment yearly, you can close your loan 1.5 years earlier, saving considerably on interest accrual.
Make part prepayments
It involves paying a portion of the principal amount in advance, over and above the scheduled EMIs. Prepayments are an effective way to reduce home loan tenure and EMI. Thus, you may utilise any extra income, like a commission or bonus, to make a prepayment on your home loan. Prepayments lower the outstanding loan amount, which leads to shortening of tenor and EMI burden.
Increase EMI amount
It may sound counterintuitive to increase the EMI amount when looking to reduce the home loan burden. However, increasing the instalment amount to an extent you can afford allows you to truncate the tenor, which, in turn, reduces the cost of a loan, i.e. home loan interest.
It is quintessential to research different lenders before applying for a home loan. Compare lenders to see which financial institution is offering the best terms on a home loan.
RBI reduced the repo rate by 250 bps cumulatively since February 2019
A lending institution may also provide pre-approved offers to ascertain hassle-free and convenient availability of credit. These offers apply to a range of secured credit facilities, like home loans, loans against property, etc. You can provide your name and mobile number to check your pre-approved offer.
Alongside these ways mentioned above, you can also avail home loan interest rate tax benefits to attenuate your overall financial burden.