The amount you pay to your lender every month with the express purpose of repaying the borrowed funds is known as EMI. A consecutive reduction in repo rate announced by RBI has resulted in some reduction in the interest rate charged by banks and NBFCs. But, the corresponding reduction in home loan interest rates in India has been low. That said, you don’t have to depend on just the rate cut for a reduction in EMIs.
Here are a few steps you can take to help reduce your home loan EMIs:
Switch to MCLR regime
MCLR regime was introduced in April 2016. Since then, all new home loans have to base the interest rate on the marginal cost of lending rate or MCLR. If you had taken a loan before April 2016, the previous rate regime might still be applicable. If this is the case, ask your lender to revise the interest rate calculation to be in line with the new regime.
Refinance your home loan
If your current lender is unwilling to reduce your interest rate, you can refinance your loan from a different lender, who is offering a better interest rate. Remember that the switch is only useful if you still have long loan tenure left. This is because the bulk of earlier EMIs go towards paying the interest, whereas later EMIs go towards repaying the principal. You can use the home loan EMI calculator to estimate your EMIs and see the breakdown into principal and interest for each EMI.
You should also consider prepayment fees and loan processing fee charged by the new lender as part of the home loan process before making your decision. Further, threatening to switch may make your lender offer better rates.
Make a lump-sum payment
Make a lump sum payment whenever possible to reduce the outstanding principal amount. This would also result in a corresponding reduction of interest amount that you have to pay on the remaining EMIs. The earlier in the loan tenure you make the lump sum payment, the greater will be the impact on overall savings on the interest. You can use the home loan EMI calculator to see the impact of reduced principal on the EMI you have to pay.
Pay back a higher amount every year
The EMI set at the onset of the loan is the minimum amount you should pay every month. But, you can make a higher monthly payment as your income rises, and you can afford to pay a higher EMI. This may sound counterproductive – pay ₹ 10,500 per month instead of ₹10,000?
The additional amount will be used to reduce the principal amount. At the time of rate reset the reduced principal will result in a lower EMI and lower total interest outlay. Another way to achieve the same result is to pay an extra EMI every year.
It is important to choose an EMI amount that you are comfortable paying every month. While selecting a shorter tenure will result in lower interest outlay, the higher EMIs may make it difficult to service the loan. Always keep your ability to repay in mind when selecting the loan tenure.