With home prices equalling several years or even decades of one’s savings, availing home loan remains the only option for most to realise this goal. However, the big-ticket size and long tenure lead to a higher EMI outgo, leaving very little room for other financial goals. Moreover, any upward movement in home loan interest rates can further deteriorate your finances.
Here are a few tips for reducing the home loan EMI burden:
For existing home loan borrowers
1. Opt for home loan balance transfer and get your loan tenure extended
As longer tenure implies lower EMI, most of us consider getting the loan tenure extended in order to reduce the EMI burden. However, extension of loan tenure with the existing lender is considered as loan restructuring, which might come under the purview of a rewriting norm. This can adversely impact the borrower’s credit score and thereby, his future loan and credit card eligibility prospect. Instead, opt for a home loan balance transfer at comparatively lower interest rate and longer tenure.
For example, assuming you had taken a home loan of Rs 35 lakh @ 9.5% for 22 years, with an EMI of Rs 31,656. Currently, you have an outstanding home loan amount of close to Rs 30.31 lakh with the remaining loan tenure of 15 years.
Now, if you opt for home loan balance transfer to another lender at 8.5% p.a. for the remaining tenure of 15 years, your EMI would come down to Rs 29,853. If you choose a longer tenure of 25 years, your EMI will further reduce to Rs 24,411. However, since a longer tenure would imply higher overall interest cost, try prepaying the loan whenever you have surplus funds in the future.
Remember that the new lender will consider your HLBT request as a fresh home loan application and hence, levy various charges such as processing fee, administrative charges, etc. Hence, ensure you factor in associated costs before opting for the balance transfer option. Go for it only if the saving interest significantly outweighs the cost of making the balance transfer.
For New Borrowers
1. Opt for a longer loan tenure
Opting for a longer home loan tenure while making the home loan application would not only reduce your EMI amount but also increase your loan eligibility. However, as a longer tenure also increases the overall interest cost of the loan, consider making prepayments as and when you have surplus in future. Remember that the RBI has barred lenders from charging prepayment fee in case of floating rate loans whereas they are free to levy or waive off this charge in case of fixed rate loans. Make the use of online EMI calculators to find out the optimum loan tenure based on your repayment capacity.
2. Go for bigger down payment
Given that the RBI allows lenders to finance up to 75%-90% of the property’s cost in the form of home loan, the borrowers need to arrange the remaining amount out of their own pockets as down payment.
While most borrowers try to opt for minimum down payment contribution, opting for a higher down payment is best for the loan applicant. A higher down payment results in lower loan amount, which in turn leads to lower interest cost and EMIs. Making a higher down payment also increases the chances of loan approval as it reduces the risk for the lender. However, while making higher down payment, do not sacrifice your emergency fund or savings of your crucial financial goals. Doing so can lead you to borrow loans for those goals at a higher interest cost.
3. Compare loan offers from as many lenders
Always compare amongst available loan options on the basis of interest rate, processing fee, etc, before finalising the lender. The interest rate and other associated costs would vary across different lenders depending on their take of credit risk associated with your profile. For example, many lenders offer home loans at lower rates and charges to those with higher credit scores. Many also price their loan rates on the basis of their job or employer profile.
With scores of banks and HFCs offering home loans, the best way to compare interest rates and features is to visit online financial marketplaces. These platforms facilitate comparison of the home loans offered by lenders basis your credit score, monthly income, job profile and other eligibility criterion.