Interest rates on home loans have increased after the repo rate hike by the Reserve Bank of India.
Rising repo also hikes the repo-rate linked home loan and personal loan interest rates.
Home loan EMI stands for Equated Monthly Installment, which is an amount that a borrower pays to the lender every month towards the repayment of his home loan. This includes both the principal amount and the interest on the loan.
When you take a home loan, you have to repay it over a fixed period of time, which is known as the loan tenure. The EMI is calculated based on the loan amount, interest rate, interest type (fixed, floating or compounded) and loan tenure.
Interest rates on home loans have increased after the Reserve Bank of India India Repo rate hiked.
Repo rate is the rate at which RBI lends money to commercial banks.
All floating rate retail loans sanctioned by banks after October 1, 2019 are linked to an external benchmark. For most banks, this is the external benchmark repo rate.
Rising repo also hikes the repo-rate linked home loan and personal loan interest rates.
Read also: Buying a Home With a Loan? Things to consider before taking a home loan
Now, amid these circumstances a borrower may want to reduce the cost of home loan amid rising interest rates to balance his household budget.
Gaurav Mohta, chief marketing officer, HomeFirst, said the recent increase in home loan interest rates after the RBI hiked the repo rate by 25 bps has put both home loan borrowers and potential home buyers on the backfoot.
Mohta lists five tips to reduce your home loan interest burden;
1. Choose a shorter period: The tenure of your home loan is an important factor in determining the amount of interest you pay every month. By choosing a shorter tenor while increasing your monthly EMI, it helps you repay your home loan faster thereby saving on interest.
2. Pay a higher down payment: Most lenders will finance 75-80% of your home loan and ask you to pay the remaining amount as downpayment. While most people try to borrow the maximum amount, it is beneficial to pay a higher amount as downpayment instead. The math is simple: Smaller loan amount = lower interest outflow.
3. Look for Better Deals: As in life, patience is the key with most expensive purchases. If you wait and watch, many lenders launch promotional schemes, especially during the festive period, that entitle you to significant savings on your home loan repayments.
4. Increase your EMI: Some lenders allow you to revise your EMI annually. So, if you get a bonus or a good hike in valuation this year, increase your EMI by a smaller proportion and reduce your overall tenure. It will reduce your overall interests.
5. PrepayPrepayment: The ultimate superpower of a borrower to reduce the impact of home loan interest. Let me explain Your monthly EMI consists of principal and interest. Prepayment is an amount paid in addition to your regular EMI which is directly deducted from your principal amount. Since your amount due to the lender is reduced quicker, you pay less interest on your loan and become debt-free faster.
Get into the habit of paying smaller prepayments at regular intervals, this will definitely reduce the overall cost of your home loan irrespective of the interest rates.
Mohta said that some lenders also offer a facility where a certain amount is auto-debited from your account towards your home loan prepayment. Since this feature is voluntary, you can opt out if it is not suitable for you in future.
Read also: Smart ways to reduce home loan EMI burden when interest rates rise
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