Moneycontrol PRO

India’s middle-class and the EMI conundrum: 4-step guide to reducing the home loan burden

Here are some ways in which housing loan borrowers can reduce their EMI burden ― increase the down payment, prepay the home loan, and switch your lender, among others.

May 06, 2023 / 12:11 PM IST
Pay a higher down payment to reduce your EMI burden.

Pay a higher down payment to reduce your EMI burden.

Home loans are a popular financing option for the middle-class, who want to own a house. The middle-class segment in India constitutes a significant part of the population, and home loans have become increasingly popular among them. The availability of home loans through banks and other financial institutions at competitive interest rates has made purchasing homes more affordable for this segment.

Over the past one year, banks have exponentially increased their interest rates on home loans. With the Reserve Bank of India (RBI) hiking the repo rate to 6.5 percent at present, home, auto and personal loans have become costlier. This means the impact of a high home loan equated monthly instalment (EMI) burden can be significant and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both.

4 ways in which home loan borrowers can reduce their EMI burden

So, how does one reduce the impact of the interest rate hikes? This can be achieved by following a few simple steps. Opting for a floating rate of interest, prepaying your loan, or just staying disciplined with your savings, maintaining good credit, and finding lenders that offer better interest rates. Let us take a closer look at these options:

Increase the down payment

Choosing to pay a higher down payment when buying a house is a good strategy to reduce the EMI burden. When you increase the down payment, the amount you borrow from the bank or financial institution decreases. This, in turn, leads to a lower principal amount, which reduces the amount of EMI. By reducing the EMI burden, 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

Prepayment of a home loan is the process of 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 and can help to reduce the overall interest burden and tenure of the loan.

By making prepayments, you are essentially reducing the principal amount of the loan, which in turn, reduces the interest charged on it. This can 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.

For example, if you have a home loan of Rs 50 lakh with a tenure of 20 years and an interest rate of 8 percent, your monthly EMI would be approximately Rs 43,000. If 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. Additionally, you would also save around Rs 12 lakh in interest payments over the entire tenure of the loan.

It is important to 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.

Also read: Prepaying home loan: Do it early to save more on interest

Opting for a floating interest rate

Choosing a floating interest rate instead of a fixed interest rate can also help in reducing your EMI burden. When you take a loan with a floating interest rate, the interest rate is not fixed and can change over the loan's tenure, depending on the prevailing market rates. When the market rates are low, the interest rate on your loan will decrease, and consequently, your EMI will decrease as well.

Let's say, you take a home loan of Rs 50 lakh for a tenure of 20 years, and the interest rate at the time of taking the loan is 8.5 percent per annum. This will result in an EMI of Rs 43,391. However, if the interest rate decreases to 7.5 percent per annum after a few months, your EMI will reduce to Rs 40,881.

In this way, a floating interest rate can help reduce your EMI burden, making it easier for you to manage your monthly finances. However, it's important to note that a floating interest rate is subject to market fluctuations, and the interest rate can increase as well, resulting in a higher EMI. Therefore, it's important to understand the risks and benefits associated with a floating interest rate before taking a loan.

Switch your lender

If you find a lender who offers a lower interest rate than your current lender, this too can reduce your EMI burden significantly. Try switching to a lender who can help with flexible repayment options and waiving off processing fees that help you save the upfront cost of taking a new loan. By exploring loan options from different lenders, you may be able to negotiate better loan terms with your current lender, which can also help reduce your EMI burden.

To summarise, with the right kind of planning, and evaluation of your financial situation, income, and expenses, you can easily reduce the high burden of a home loan and ease the pressure on your savings.

Also read: Should you pay off your home loan before investing for retirement?

Atul Monga is Co-founder & CEO, Basic Home Loan