Banks have exponentially increased their interest rates on home loans over the past one year when the Reserve Bank of India was in a rate hike spree.
New Delhi: One of the most popular financing option for the middle-class who wants to own a house is a home loan. And the same middle-class constitute a significant part of the population. Home loans have become more affordable in India after the availability of home loans through banks and other financial institutions at competitive interest rates has made purchasing homes more affordable for this segment.
Banks have exponentially increased their interest rates on home loans over the past one year when the Reserve Bank of India was in a rate hike spree. The repo rate of 6.5 per cent has made home, auto and personal loans costlier.
How Can You Bring Down the EMI Burden Of Home Loans
There are 4 simple ways to reduce the impact of interest rate hikes:
Increase the down payment: If you choose to pay a higher down payment when buying a house, it will help you reduce the EMI burden. The more you pay as down payment, the less you have to borrow from a bank or a financial institution. This, in turn, leads to a lower principal amount, which reduces the amount of EMI. And by reducing the EMI amount, you can save a significant amount of money in the long run, as you will pay less interest over the tenure of the loan.
Additionally, a higher down payment also reduces the overall cost of the loan, as you will be borrowing less money and paying interest on a smaller amount. Moreover, a higher down payment demonstrates to the lender that you are committed to repaying the loan and reduces the risk of default. This can result in a lower interest rate, which further reduces the EMI amount.
Choose home loan prepayment: When you prepay a home loan it means you’re making additional payments towards your outstanding home loan amount, over and above your regular EMI payments. This can be done either through a lump sum or in smaller instalments. Prepayment of loans can help to reduce the overall interest burden and tenure of the loan.
When you do a prepayment, you are essentially reducing the principal amount of the loan, which in turn, reduces the interest charged on it. The prepayment of a loan could lead to a significant reduction in the total interest paid over the tenure of the loan, and can also help reduce the overall EMI burden.
Let’s take an example. If you have a home loan of Rs 50 lakh with a tenure of 20 years and an interest rate of 8 per cent, your monthly EMI would be approximately Rs 43,000.
In case you make a prepayment of Rs 5 lakh, your outstanding principal would reduce to Rs 45 lakh, which would result in a reduced EMI of around Rs 38,500. Apart from that, you would also save around Rs 12 lakh in interest payments over the entire tenure of the loan.
However, you should note that many banks and financial institutions charge a prepayment penalty if you choose to make prepayments on your fixed-interest rate home loan. Therefore, it is important to carefully review the terms and conditions of your loan agreement before making any prepayments.
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