Here are six ways existing home loan borrowers can reduce their EMI.
1. Change the interest-based pricing mode
A large segment of existing home loan borrowers are so busy with their lives that once repayment begins, they often forget to check how their EMI composition is changing.
Over the past 10-12 years, there have been many changes in the way banks charge interest on loans. For example, prior to July 1, 2010, all loans were pegged to a base base interest rate (BPLR), which was then changed to a base rate from that date. After April 1, 2016, all floating rate loans from banks were pegged to Loan rate based on the marginal value of cash (MCLR), which was then changed to the External Benchmark Rate (EBR) effective October 1, 2019. Depending on the time of the loan repayment, your loan will continue in the same old mode, unless you switched to the new mode.
While all interest rate regimes should ideally charge the same rate, this is not actually the case. You can most likely pay a much higher interest rate under older regimes such as BPLR, base rate, or MCLR, compared to an EBR pegged loan. If you convert your loan to an EBR-linked loan, then there is a good chance that your interest rate will go down, and therefore your EMI.
For example, if you have a home loan from
(PNB) under the MCLR regime, then the minimum interest you will be charged currently must be 7.3% or higher as this is their MCLR for one year. On the other hand, if you choose Repo-linked lending rate (RLLR) a loan from PNB, then you can get a loan at a much lower interest rate as the bank’s RLLR is 6.80%. Thus, when you change the interest rate regime, your interest rate is reduced by 0.5%.
You can contact your existing bank for this change and they can allow you to do so after charging a nominal transition fee. IN
(SBI), for example, levies Rs 5,000 plus goods and services tax for mode switching.
2. Transfer the loan to a new lender.
Although many banks and home finance companies offer home loans, the interest rates they charge vary widely. Thus, there is a good chance that you are paying a higher EMI just because your loan is not from a competing lender. If you haven’t compared your interest rate, then it’s time to do so and check if your lender is charging a higher rate even on EBR. Since most home loans have a floating interest rate and there are no loan transfer penalties, the only cost will be the fees charged by the new lender. If you get a competitive rate, a balance transfer can help you lower your EMI.
3. Transition from fixed to floating rate
If you took out a fixed rate loan, chances are good that you will pay a much higher interest rate throughout the life of the loan. Lenders usually charge at least 1-2% higher rate on fixed rate loans. For example, 5 years ago, if a floating rate loan was available at 9%, then fixed rate loans were provided with an interest rate of about 10.5%. And if the borrower chooses a fixed rate loan, he will be at a disadvantage in the current situation. Although floating rate interest rates have dropped to about 7%, fixed rate borrowers will still pay a higher interest rate of 10.5%.
Since interest rates are currently at historically low levels, it may make sense for a fixed rate borrower to switch to a floating rate loan from either the same lender or a different lender, as they may find this transition beneficial despite paying a fine for withdrawal of a loan with a fixed rate. In the example above, by switching to a floating rate loan, the borrower would save Rs 4,869 per month in EMI and 5.85 lakh in interest payments over the remaining tenure.
|Savings by switching from a fixed to a floating rate|
|Outstanding loan||30 lakh rupees||30 lakh rupees|
|Remaining tenure||10 years||10 years|
|Total interest payable||Rs 18.58||Rs 12.73|
4. Make a partial prepayment and set up the EMI.
Borrowers of floating rate home loans have a lot of flexibility to repay partial prepayments without any penalties, which they can use to reduce their EMIs. Any partial prepayment will significantly affect the life of your loan, as this amount is fully used to reduce the outstanding principal. As a result, the term of the loan is shortened and the loan is repaid faster. However, if you do not wish to reduce your tenure, you can ask your lender to reduce your EMI after a substantial advance payment.
5. Ask for an extension of the term.
If you are facing any kind of financial stress and want some relief by reducing your home loan EMI, then you may want to consider extending the term of your loan. For example, if you have 10 years left on an outstanding mortgage of 40 lakhs at 7.5%, then extending the tenure to 20 years can help you lower your EMI by Rs 15,257.
|Reduced EMI by extending the remaining tenure|
|Renewal of tenure||Old EMI (RS)||New EMI (RS)||Decline (Rs)|
|10 to 15 years old||47481||37080||10401|
|10 to 20 years old||47481||32224||15257|
|15 to 20 years old||37080||32224||4856|
|15 to 25 years old||37080||29560||7520|
|20 to 25 years old||32224||29560||2664|
|20 to 30 years old||32224||27969||4255|
|For an outstanding home loan of 40 lakh at 7.5%|
However, this option may not work for all borrowers, especially for a borrower close to retirement age. Most lenders offer a maximum tenure until the borrower turns 60. Thus, a 45-year-old borrower will not be able to extend the ownership of the property for more than 15 years.
In addition, you also need to remember that the longer the term of the loan, the higher the interest payment will be. While you can use the renewal option as a short-term temporary measure, as your finances improve, you should either regain your previous ownership or make a partial upfront payment to speed up repayment.
6. Use the loan restructuring offered by RBI
The ongoing pandemic has pushed many people into financial stress when it is difficult for them to make ends meet. Many such borrowers find it difficult to temporarily pay for their EMIs. Such borrowers can contact their lender and opt for a moratorium. The moratorium cancels the EMI or principal for a period of time and then restructures the loan to a suitable repayment schedule. However, remember that in order to take advantage of this benefit, there must be no default on your loan by 31 March 2021 and you can apply for this benefit by 30 September 2021. The savings during the grace period and the total amount you will have to pay will be much higher.