Follow These Tips to Reduce your Home Loan EMI Burden

Home loan borrowers preferring lower EMIs usually opt for longer loan tenures, which in turn increases their overall interest costs. Here I will present some tips for prospective and existing home loan borrowers to reduce their EMI burden while simultaneously reducing their interest costs.

For existing home loan borrowers

Full/Partial Prepayments of their Existing Home Loan

Home loan lenders allow their existing borrowers to prepay their outstanding loan, in partial or full, to reduce their overall interest costs. Furthermore, borrowers can either choose to reduce their EMI or bring down their loan tenure after prepaying their home loan. Reducing the repayment tenure will lead to higher interest cost savings than opting for the EMI reduction option.

Note that existing home loan borrowers should not forgo their monthly contributions or sacrifice their existing investments set aside for fulfilling important financial goals. Doing so may force them to avail loans at higher interest rates in future for meeting those unavoidable financial goals.

Opt for the home loan overdraft option

Many banks/HFCs offer the home loan overdraft facility, branded as home loan advantage, home saver, etc. for their existing home loan borrowers looking for higher liquidity. Under this facility, the lender opens an additional overdraft account (either savings or current account) where the borrower can park his surpluses and later withdraw it from the account depending on his cash flow requirements. The lender then calculates interest costs after deducting the surplus amount parked in the overdraft account from the outstanding loan amount. This facility allows borrowers to prepay their home loans without sacrificing their liquidity.

Transfer your existing home loan to another lender

The home loan balance transfer (HLBT) facility allows existing home loan borrowers to transfer the outstanding balance from their loan to another bank/HFC at lower interest rates. Under this option, the new lender would first pay off the existing borrower’s outstanding home loan amount to the original lender and then, sanction a new home loan at a lower interest rate and/or longer tenure to the borrower. The HLBT option is especially suitable for borrowers who had earlier availed home loans at higher interest rates due to their poor credit profile but are now eligible for lower home loan rates as their credit profile has improved. Home loan borrowers can also transfer their loans if their existing lenders refuse to lower the interest rates.

Note that increasing the loan tenure of your existing home loan is considered as loan restructuring, which negatively affects your credit score and future loan eligibility. Hence, existing borrowers looking to increase their home loan tenures to reduce their EMIs can opt for balance transfer. However, they should conduct a detailed cost-benefit analysis before exercising the HLBT option as they would have to submit fresh documents and incur costs associated with availing a new home loan. Home loan borrowers should opt for balance transfer only if the interest cost savings and other benefits from exercising this option exceed the costs and effort involved in transferring the loan to another lender.

Increase your EMI

Home loan borrowers can reduce their existing loan’s interest costs by requesting their lender to increase the EMI amount. Borrowers having sufficient surplus out of their monthly income, after factoring in their existing EMIs and unavoidable expenses, are more suited to exercise this option. Usually, lenders prefer their home loan borrowers’ EMI/NMI (Net Monthly Income) ratio, i.e. the total monthly repayment obligations need to be within 50-55% of their net monthly income. Therefore, lenders may ask their borrowers to provide bank statements and income proofs to re-evaluate their repayment capacity before approving an increase in their EMIs. However, they should not sacrifice their monthly contributions towards their crucial financial goals when opting for increased EMIs. Doing so may force them to avail higher interest rate loans in future to fulfil those unavoidable financial goals.

 For new home loan borrowers

Opt for lower LTV ratios

The RBI permits lenders to offer home loans by financing up to 90% of the total cost of home property, depending on the loan amount. The Loan-to-Value (LTV) ratio is the proportion of the property’s cost financed through a home loan. Existing borrowers must contribute the remaining loan amount from their own sources either through down payment or margin contribution. While home loan borrowers usually prefer higher LTV ratios, selecting a lower LTV ratio has its advantages. Having lower home loan LTV ratios for the same tenure leads to lowering of both interest costs and EMIs. Furthermore, lower LTV ratio reduces the lender’s credit risk, thereby increasing the borrower’s chances for getting home loan approval. However, they should avoid liquidating their existing investments or emergency funds, saved for fulfilling their financial goals, to make higher down payments by selecting higher LTV ratios.

Compare home loan offers among prospective lenders

Home loan features including interest rates, loan amount, tenure, processing fees, etc. can vary widely across multiple banks/HFCs depending on their cost of funds and their loan applicants’ credit risk assessment. Hence, prospective applicants must compare the home loan features of multiple lenders before making the loan application. They can visit online financial marketplaces like Paisabazaar.com to check and compare the home loan interest rates and other features of multiple lenders before applying for a loan with a particular lender.

Select longer loan tenures

Existing borrowers can reduce their home loan EMI burden by choosing longer loan tenures. Doing so can increase their home loan eligibility due to the reduced EMI/NMI ratio. However, as the interest costs increase due to longer loan tenures, borrowers should opt for full/partial home loan prepayments whenever they have surplus funds.