Tuesday, November 19

Ways to Reduce Interest on Your Home Loan EMI

Most people dream of owning a house of their own, but we all know that purchasing a home is a big decision as it involves a huge investment. In order to buy a home, many people take Home Loan with low-interest rates that are offered by finance companies and banks. This is mainly because repaying a home loan through EMIs can be quite a taxing affair.

Although, what’s even more difficult is when EMI is high and is more than 50% of a borrower’s income. In such a situation, the person would not have enough money left for other monthly expenses. Hence, it is always advisable to maintain a low debt-to-income ratio, where a borrower’s EMI is less than 50% of the income. So then, how does one ensure payments are affordable?

Here are some tips and ways to reduce the interest on your home loan EMI:

Higher down payment: Higher down payments reduces the principal amount. Lower principal amounts means lower EMI payments and a lower interest rate.

Home loan prepayment: If you have a chance to make a prepayment of a portion of your home loan before the tenure, then this can reduce your overall interest payments. However, organizations charge a penalty fee in such cases.

Annual increase in home loan EMI: Due to yearly increase in the net income, you could choose to increase your home loan EMI in order to save on interest. However, this decision must be determined on the basis of your net income. You could choose to increase your EMI amount by at least 5% every year, this will help in reducing your interest burden.

You could arrange this interest with your annual bonuses or increase in salary. This can also be combined by paying an additional EMI yearly, and you can also increase your EMI amount by 5% every year. All of this combined would reduce your interest amount significantly. If you find this complicated, use the home loan EMI calculator to calculate your monthly EMIs easily.

Look for lower interest rate offers: Before going in for a loan make sure to do all your research and analysis well. Choose the one that offers you the lowest interest rate. If you’re someone who has already taken a home loan and is looking to reduce the interest rate, then you could switch another bank or financial institution that is willing to give you a lower interest rate.

In such cases, refinancing your home loan could be a good decision to reduce your interest burden. However, keep in mind that extra charges like legal and processing fees will be applicable when you decide to switch to another bank.

Switch to MCLR: All home loans that are taken after April 2016 follow the marginal cost of funds based lending rate (MCLR). Here, the borrower benefits from the change in the interest rates. Therefore, if you’ve taken a home loan before April 2016, this can be changed to MCLR, which will then allow the bank to reset the interest rate after 12 months. However, once you receive the reset date, evaluate your decisions.

Quick repayment of principal amount: Ensure that you make quick repayments of your principal amount because the lesser the principal amount, the lesser will be the interest amount to be repaid.

It’s always important to go with an EMI that is affordable. It is true that a shorter loan tenure will lead to a lower interest amount, but keep in mind that it would increase your EMI. Hence, keep affordability as the number one factor when choosing your EMI amount.

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