Home Loan: 6 Ways Existing Home Loan Borrowers Can Reduce EMI Amount
Here are six ways existing home loan borrowers can reduce their EMI amount.
1. Change your interest rate regime
A large portion of existing home loan borrowers are so busy with their lives that once repayment begins, they often forget to check the evolution of their EMI makeup.
Over the past 10 to 12 years, there have been many changes in the way banks charge interest on loans. For example, prior to July 1, 2010, all loans were tied to the Benchmark Prime Lending Rate (BPLR) which was then replaced by the base rate from that date. After April 1, 2016, all variable rate loans from banks were tied to the marginal cost of funds (MCLR) -based lending rate, which was later replaced by the external reference rate (EBR) from October 1. 2019. Depending on the timing of your loan disbursement, your loan would continue in the same old plan if you did not switch to a new plan.
While all interest rate plans should ideally charge the same rate, in reality this does not happen. You are likely to pay a much higher interest rate under older plans like BPLR, Base Rate, or MCLR compared to an EBR linked loan. If you switch your loan to an EBR linked loan, there is a good chance that your interest rate will go down and, as a result, your IME will go down as well.
For example, if you have a home loan of
(GNP) under the MCLR plan, then the minimum interest you would pay currently should be 7.3% or more, as this is their MCLR for one year. On the other hand, if you go for a loan linked to PNB’s Repo Tied Loan Rate (RLLR), you can get a loan at a much lower interest rate because the bank’s RLLR is 6. , 80%. Therefore, by changing the interest rate regime, your interest rate decreases by 0.5%.
You can contact your existing bank for this change, and they may allow you to do so after charging a nominal change fee. The
(SBI), for example, charges Rs 5,000 plus GST for the regime change.
2. Transfer your loan to a new lender
Although a home loan is offered by many banks and housing finance companies, there is a big difference in the interest rate they charge. So there is a good chance that you will pay a higher IME just because your loan is not from a competitive lender. If you haven’t compared your interest rate, it’s high time you did and check to see if your lender charges a higher rate, even under the EBR. Since most home loans are variable rate and there is no penalty on transferring your loan, the only cost involved will therefore be the fees charged by the new lender. If you get a competitive rate, a balance transfer can help lower your EMI.
Also read: Bank vs HFC: Find out the lowest mortgage rates for loans above Rs 30 lakh to Rs 75 lakh
3. Switch from fixed rate to variable rate
If you had taken out a fixed rate loan, you are likely to pay a much higher interest rate over the life of your loan. Lenders typically charge a rate of at least 1-2% higher on fixed rate loans. For example, 5 years ago, if the variable rate loan was available at an interest rate of 9%, the fixed rate loans have an interest rate of around 10.5%. And if the borrower went for a fixed rate loan, he would be at a disadvantage in the current situation. While interest rates on the variable rate have fallen to around 7%, fixed rate borrowers would still pay a higher interest rate of 10.5%.
Since interest rates are currently at an all time low, it may be wise for a fixed rate borrower to switch to an adjustable rate loan either with the same lender or with another lender, as they may find the advantageous change despite the payment of a penalty in the event of seizure. a fixed rate loan. In the example above, by switching to a variable rate loan, the borrower will save Rs 4,869 per month on IMEs and Rs 5.85 lakh on the interest payment for the remainder of the term.
|Save by switching from a fixed rate to a variable rate|
|Unpaid loan||Rs 30 lakh||Rs 30 lakh|
|Remaining time||10 years||10 years|
|Total interest payable||Rs 18.58 lakh||Rs 12.73 lakh|
4. Make a partial prepayment and have the IME adjusted
Variable rate home loan borrowers have great flexibility to make a partial prepayment without any penalties which they can use to lower their EMIs. Any partial prepayment has a significant impact on the term of your loan because that amount is fully used to reduce the principal amount outstanding. As a result, the loan term decreases and the loan is repaid faster. However, if you don’t want to reduce the term, you can ask your lender to reduce your EMI after a substantial prepayment.
5. Opt for the extension of the mandate
If you are facing some kind of financial stress and want relief by reducing your mortgage EMI, you may want to consider extending the term of your loan. For example, if you have 10 years left on your Rs 40 lakh mortgage loan at 7.5%, extending the tenure to 20 years can help you reduce your EMI by Rs 15. 257.
|Reduce the EMI by extending the remaining term|
|Extension of term||Former NDE (Rs)||New NDE (Rs)||Reduction (Rs)|
|10 years to 15 years||47481||37080||10401|
|10 years to 20 years||47481||32224||15257|
|15 to 20 years||37080||32224||4856|
|15 to 25 years||37080||29560||7520|
|20 to 25 years||32224||29560||2664|
|20 to 30 years||32224||27969||4255|
|For an outstanding mortgage of Rs 40 lakh at 7.5%|
However, this option may not work for all borrowers, especially the borrower who is nearing retirement age. Most lenders offer a maximum term until the borrower is 60 years old. Thus, a 45-year-old borrower may not be able to extend the term beyond 15 years.
Additionally, you should also remember that the longer the term of your loan, the higher your interest expenses will be. While you can use the term extension option as a short-term temporary measure, as your finances improve, you must either reinstate the old term or make a partial prepayment to speed up the repayment.
6. Use the loan restructuring offered by RBI
The ongoing pandemic has pushed many people into financial stress, where they are struggling to make ends meet. Many of these borrowers find it difficult to temporarily pay their IMEs. These borrowers can approach their lender and opt for a moratorium. A moratorium waives the IMEs or the principal part for a period of time and restructures the loan into an appropriate repayment regime afterwards. However, remember that to benefit from this benefit, there should be no default on your loan until March 31, 2021, and you can apply for this relief before September 30, 2021. In addition, when you opt for a moratorium, you must remember that the interest will remain accrued during the relief period and the total amount you will have to pay will be much higher.