Rising repo also pushes up the interest rates of repo-rate linked home loans and personal loans.
Home Loan EMI stands for Equated Monthly Instalment, which is an amount that a borrower pays to the lender each month towards repayment of their home loan. It includes both the principal amount and the interest on the loan.
When you take a home loan, you have to pay it back over a certain period of time, known as the loan tenure. The EMI is calculated based on the loan amount, interest rate, type of interest (fixed, floating or mixed) and loan tenure.
The interest rates on home loans have increased after the Reserve Bank of India hiked the Repo rate.
Repo rate is the rate at which the 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 of the banks, this external benchmark is Repo rate.
Rising Repo also pushes up the interest rates of Repo-rate linked home loans and personal loans.
Now, amid these circumstances a loan borrower seeks to minimise the cost of a home loan amid increasing interest rates, to balance the budget of his/her house.
Gaurav Mohta, chief marketing officer, HomeFirst, said that the recent rise in home loan interest rates as RBI hiked the Repo rate by 25 bps has put both home loan borrowers and potential home buyers on a back foot.
Mohta has suggested five tips to reduce your home loan interest burden;
1. Choose a shorter tenure: The tenure of your home loan is a key factor in determining the amount of interest you pay every month. Choosing a shorter tenure while increasing your monthly EMI, it helps in repaying your home loan early thereby saving on interests.
2. Pay a higher down payment: Most lenders will finance 75-80% of your home loan and ask you to pay the rest as a downpayment. While most people try to borrow the maximum amount, it is beneficial to instead pay a higher amount as a downpayment. The maths is simple: Smaller loan amount = Smaller interest outflow.
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3. Watch out for better deals: As is the case in life, for most high-ticket purchases, patience is the key. If you wait and watch, especially during the festive periods, many lenders roll out promotional schemes, prompting you to make significant savings on your home loan repayment.
4. Increase your EMI: Certain lenders allow you to revise your EMI annually. So, if you get a bonus or a good appraisal hike this year, increase your EMI by a small proportion and reduce your overall tenure. This will reduce your overall interests.
5. Make Prepayments: The ultimate superpower a borrower has to reduce the effect of home loan interest – Prepayment. Let me explain. Your monthly EMI consists of a principal and interest. Prepayment is an amount paid over and above your regular EMI that is deducted directly from your principal. Since your amount due to the lender is reduced early, you pay less interest on your loan and become debt free faster.
Make it a habit to pay-up smaller prepayments in regular intervals this will surely minimise the overall cost of your home loan irrespective of the interest rates.
Mohta added that some lenders also provide a facility where a certain amount of money gets auto-debited from your account towards your home loan prepayment. Since this facility is voluntary, you can choose to opt out of it if it doesn’t suit you in the future.
