Availing a home loan can push individuals into huge liabilities which they may have to carry for their lifetime. A significant part of their income goes towards paying the Equated Monthly Instalments (EMI). Paying the monthly installments can be tough for individuals, especially if they have budget constraints. However, several ways can help them reduce loan EMIs to make repayment more manageable.
6 Proven Ways to Reduce Home Loan EMI
Here are six ways through which individuals can reduce their monthly instalment payments:
- Higher down payment
A down payment is the amount individuals pay during the time of constructing or purchasing a house. It is a part of the total price of the house. Paying higher down payments benefit individuals as they have to borrow less money from financial institutions. It will help them reduce their monthly installments and save significantly in the long run. However, if the down payment is less, individuals will have to opt for a higher loan amount which will increase their overall interest, resulting, raising their EMI amount.
- Longer repayment tenor
Opting for a longer repayment tenor reduces loan EMI amount as the total obligation is distributed over a longer period. However, it will affect the interest amount as the duration is longer.
A longer tenor will reduce EMIs but individuals will have to pay more interest amounts because the rate of interest stays applicable for an extended period. Therefore, one must carefully consider all the positive and negative impacts when planning to determine the loan tenor.
- Negotiating for a lower interest rate
When individuals want to avail of a home loan, it is recommended that they should have a good credit score. A good score describes their high creditworthiness and helps them negotiate the interest rate with the lending institutions. Furthermore, financial institutions also check other aspects like income, age, etc., while setting the interest rate of their customers. Before applying for the loan, they should ensure that they have met the eligibility parameters properly.
- Transferring the loan
Individuals can opt to change their lenders through the home loan balance transfer facility if other lenders charge lower interest rates. There might be a chance that individuals are paying higher monthly installments because their lenders charge comparatively higher interest rates. Individuals can compare the interest rates of multiple lenders and choose the most suitable one for a home loan balance transfer.
- Opting for a floating interest rate
The rate of interest is one of the most significant factors that affect debt obligations. If individuals have opted for a fixed interest rate on their home loan, there is a high chance that they are paying higher interest amounts throughout the tenor than those borrowers who have taken the loan on a floating interest rate.
Opting for a floating rate of interest will be one of the best options as it comes at a 1-2% lower interest rate than the fixed rate home loan. However, the floating interest rate does not remain fixed. It fluctuates depending on many factors but makes the loan affordable. Furthermore, individuals can use an online home loan calculator to calculate the difference in the interest amount between fixed and floating rates of interest.
- Making partial prepayment
Making partial prepayment of the home loan amount will help individuals to reduce their monthly installments in the long run. If individuals partially prepay the loan amount during the tenor, it will bring down the principal amount. In addition, it lets borrowers either reduce the tenor or the monthly installments that individuals need to pay. However, individuals can ask their lenders not to reduce the tenor if they want more time to pay the due amount.
In this regard, individuals must also know how to do EMI calculations. It will help them find out the monthly installments they need to pay to clear their dues. Furthermore, this calculation will also assist them to plan their finances accordingly and opt for a suitable loan tenor.
Home loan EMI calculation
Individuals can calculate their home loan monthly instalments by using the following formula:
EMI = P x R x (1+R) ^N / [(1+R) ^N-1]
Where,
P = Principal amount
R= Current home loan interest rate
N Home loan repayment tenor (in months)
However, calculating the home loan EMI manually can be a tedious task and might lead to errors. Individuals can use an online EMI calculator to know the monthly instalments easily.
For this, they need to visit the website of a lender and go to their webpage for the EMI calculator. After that, they need to fill in the basic details like loan amount, tenor and the interest rate of the home loan. Subsequently, they will get the installment amount they need to pay each month within a few seconds.
In addition, certain financial institutions provide pre-approved offers on their products like home loans and loans against property for their existing customers. It will help individuals to expedite their loan application process. To check pre-approved offers, individuals need to fill in their basic details like their name and contact number.
Paying a home loan in monthly installments is one of the biggest monthly expenses for any individual. It usually consumes a major portion of their monthly income. However, individuals can seek the above strategies which will help them to reduce loan EMI payments.
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