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Is your Cash Flow Comfortable? Decrease your Housing Loan Tenor Now

After countering an economic slowdown in 2020, India is gradually coming out of recession. The GDP grew 1.6% in the fourth quarter of 2020-2021. The Gross Value Added (GVA) also registered a growth of 3.7% in Q4 of the same period.

As a ripple effect, the income of salaried individuals is also likely to increase almost by 6.4% on an average in 2021, says a Wills Towers Watson survey. With sufficient disposable income, individuals can now avail a home loan against a reduced tenor with ease.

Existing borrowers can also reduce their home loan interest burden by cutting the loan tenor short. Following is a look at how to reduce the tenor and maximise savings effectively.

Ways to decrease home loan tenor and maximise savings

Typically, a home loan accompanies a tenor of up to 20 years. While it allows individuals to service affordable EMIs, the interest outgo might increase significantly. Nonetheless, if a borrower has sufficient cash flow, he/she will be able to repay the loan faster with increased EMIs.

Following are some of the most effective ways to reduce home loan tenor and save on interest.

  1. Apply to increase EMI payable

Individuals with a spotless credit history are eligible to negotiate loan terms with their existing lender. However, before approving the same, lenders assess several factors, including the FOIR of the applicant. If the FOIR is less than 40%, a lender is likely to approve the application.

There are two possible ways to reduce FOIR – increase income or reduce fixed obligations. In case you are servicing a home loan, and any of these instances improve your repayment capacity, you can apply to increase the EMI payable.

With increased EMIs, you can repay the loan faster within a shorter tenor. However, you can always opt for the assistance of a home loan EMI calculator to estimate monthly instalments and interest payable.

  1. Opt for part-prepayment

Another way you can trim your home loan tenor is by opting for part-prepayment. It allows you to repay a lump sum amount when you have surplus funds. You can utilise income from incentives, bonuses, earnings from investments, and other sources to make the prepayment.

It helps in reducing the tenor and also the interest payable. For instance, an individual opted for a home loan of Rs.50 lakh for 10 years with an interest rate of 7.5%. Now he/she earns Rs.20 lakh from prior investments and decides to pay the amount towards loan settlement. In that case, the new EMI would come down to Rs.35,611 from Rs.59,351, or the tenor would reduce to 61 months or 5 years and one month.

Hence, part-prepayment is one of the best ways to reduce home loan tenor. It is also an effective way to decrease your home loan interest. Selected financial institutions also allow individuals to make part-prepayment without any additional fees.

  1. Consider home loan refinancing

Generally, individuals opt for the balance transfer facility to get a reasonable home loan interest rate. However, it also allows them to shorten the loan tenor. Existing borrowers can transfer the outstanding loan balance to a new lender, and they can choose a short tenor to repay the due amount. Since the interest rate is lower with a new lender, the EMI would not increase that much compared to EMIs with the previous interest rates.

To leverage more benefits, it is important to know when should you do a home loan balance transfer. Note that existing borrowers can opt for home loan refinancing only after a certain period has passed from availing the loan.

Existing borrowers can also avail pre-approved offers that make loan processing quick and straightforward. Besides home loans, such offers are also available on various credit products like loans against property. Enter your name and mobile number to check your pre-approved offer.

Besides reducing the tenor of a home loan in India, new borrowers can also reduce interest burden by following some simple tips –

  • Meet lender-specific eligibility criteria to avail competitive interest rates and reduce borrowing cost.
  • Opt for a higher down payment and reduce the loan amount applied for.
  • Compare different lenders before applying with one.
  • Choose a shorter tenor.
  • Select the right interest type.

However, besides interest, both new and existing borrowers can save further on income tax payable when they service a home loan. It allows them to save up to Rs.1.5 lakh on principal payment under Section 80C of the ITA. Moreover, they can also avail tax benefits of up to Rs.2 lakh on interest payment.

It is always advisable to shorten the home loan tenor if you maintain an adequate cash flow. It results in a lower borrowing cost and improves credit score due to faster repayment without fail.

Handy Tips to Free Yourself From Home Loan EMI

As per a recent financial report, the number of home loan accounts in India stood at 14.2 million, as of December 2019. Owing to rapid digitisation and the emergence of several HFCs, housing credit has become significantly popular among aspiring homeowners in recent years.

  • Home loans account for nearly 50% of the credit portfolio of consumers in India
  • According to reports by RBI, the total outstanding balance in the home loan segment stood at Rs.13.3 lakh crore, as of February 2020.

Availing a housing loan provides considerable financial flexibility in acquiring a residential property, particularly due to the extensive repayment period. It allows borrowers to repay the credit amount with relative ease.

However, without proper planning, repayment can also overbear an individual’s finances. To that end, several prospective borrowers utilise a home loan EMI calculator. Apart from that, you can also employ other measures to attenuate the EMI burden. Nonetheless, first, it’s essential to understand the building blocks of home loan installments.

What is home loan EMI?

Repayment of a home loan occurs across a specific tenor in fixed monthly installments or EMIs. When you avail a housing credit facility, the lending institution computes this amount based on the principal, interest rate, and repayment tenor. Each of these factors, thus, plays a crucial role in the determination of the amount you need to pay as EMIs. Naturally, the measures you can adopt to ensure low home loan EMI also revolves around these factors.

What are the ways to reduce the housing loan EMI burden?

  • Opt for a longer tenor

The repayment period you choose is of heightened significance in regard to the EMI amount and overall cost of a loan. A prolonged tenor results in smaller EMIs. Conversely, the installment amount you need to pay goes up if you opt for a shorter tenor.

However, the cost of a loan, which primarily includes total interest payable, is less if the repayment period is short and vice versa.

Thus, it may be beneficial to ensure an EMI amount that allows you to maximize your financial benefits, whether it’s owing to smaller installments or less interest payable. You can use a house loan calculator to determine how much home loan EMI you can afford.

  • Choose a higher down payment amount

A financial institution provides a home loan based on the loan-to-value ratio, which is a percentage of the property’s value you are purchasing. As per RBI mandate, a borrower needs to pay such remaining amount as a down payment. While you can pay the minimum amount and avail the rest as a loan, you may also choose to make a higher down payment.

  1. 90% – The loan-to-value ratio for home loans below Rs.30 lakh

That way, you can reduce the principal amount. With a low loan quantum, the cost of a loan will go down. Resultantly, the EMI you need to pay will also be more moderate. It is one of the most effective ways to reduce home loan tenor and EMI. You may utilise a home loan EMI calculator to reckon the down payment amount such that EMIs are in line with your affordability.

  • Arrange for better terms on the existing loan

You can negotiate with your existing lending institution to lower the home loan interest rates. In case your credit score has improved since you availed the home loan initially, and possess a credible repayment history, the lender might revise the interest rates to reflect the same. This way, you can effectively reduce the installment amount on your housing loan.

  • Increase EMI amount

In case you are a salaried individual, chances may be that your income has incremented over time. You can, thus, utilize the additional income to repay your home loan faster by opting for higher EMIs. Higher EMIs reduce the tenor, which, in turn, lowers the cost of a loan. A home loan EMI calculator may be of benefit to you when deciding the installment amount.

  • Opt for a balance transfer

Reputed financial institutions provide the facility of a home loan balance transfer. Therein, you can refinance your existing loan with a different lender that’s levying a lower rate of interest. This way, you can attenuate the home loan burden by paying smaller installments.

However, merely lower interest rates do not suffice to ensure benefits from a home loan balance transfer. According to financial experts, if the new rate of interest is not lower by 0.5%, a home loan refinancing might not reap any monetary benefits. That’s because of the associated charges and costs of a balance transfer.

Moreover, a balance transfer is most fruitful financially in the initial stages. If the repayment period of your home loan ends within 5 years, a balance transfer may not give way to any financial advantage.

ReadUse Home Loan EMI Calculator & Manage Your Installments in Advance

Nevertheless, when applying for a home loan, you might want to research lenders extensively before applying in order to maximize your benefits.

  • Home loans grew year-on-year at a rate of 17%, as of February 2020.

Certain financial institutions provide pre-approved offers on loans to ascertain an expeditious and hassle-free process. These offers are available on an array of financial products, like a home loan, loan against property, etc. You may provide your name and mobile number to check your pre-approved offer.

Nonetheless, ensure that you prepare a thorough repayment plan before applying for a housing loan. To that end, you might utilize a home loan EMI calculator. Moreover, regulate home loan EMIs in tandem with your changing financial position during the course of repayment to ensure efficient management.