Looking at ways to reduce your home loan EMIs? here's how

The decision of the Monetary Policy Committee (MPC) to keep the repo rate unchanged at 4 percent would have disappointed many existing as well as new home loan borrowers. As most banks have linked their home loans to the RBI's repo rate, a reduction in the repo rate would have reduced their EMIs.

Opting for a longer home loan tenure is the best way to lower EMI, extending the repayment tenure can reduce your EMI burden. However, the extension of the loan tenure with your existing lender is considered as loan restructuring, which can adversely impact your credit score and future loan eligibility. Instead, you may consider transferring your existing home loan to another lender and opt for a longer loan tenure.

For instance, if you had availed a home loan of Rs 50 lakh five years ago at 8 percent interest and a tenure of 20 years, your EMI would be close to Rs 41,822. Presently, your outstanding home loan amount would be around Rs 43.76 lakh and the balance tenure would be 15 years.

Now, if you transfer your existing home loan to another lender at 7 percent annually, for the remaining loan tenure of 15 years, the EMI would come down to Rs 39,335. And if you opt for a longer tenure of 25 years, your EMI would further reduce to Rs 30,391.

However, as a longer loan tenure leads to higher interest cost, you should always try to prepay your home loan whenever you have surplus funds. This will reduce your overall interest cost.

Moreover, as home loan balance transfer applications are considered as fresh home loan applications by the new lenders, they may levy various fees and charges like processing fee, administrative fee, etc during the loan processing. Thus, factor in the associated costs before opting for the balance transfer option. Go ahead only if your overall savings in interest considerably outweigh the cost of loan transfer.

New home loan borrowers

RBI allows home loan lenders to finance up to 90 percent of the cost in the form of home loan. The ratio of the sanctioned loan amount to the property cost is known as the Loan to Value (LTV) ratio. The borrowers have to contribute the remaining amount from their own pocket. While most borrowers generally prefer higher LTV ratios to preserve their own finances, opting for a lower LTV ratio has its advantages. First, it will lead to lower interest cost for financing your house property. Second, it will reduce your EMI for the same tenure.

Do not use your emergency fund or existing investments earmarked for crucial financial goals in your attempt to make a higher contribution to your home purchase/construction. Doing so may lead you to avail costlier loans to deal with financial exigencies or meet your crucial financial goals.

While opting for a longer home loan tenure would reduce your EMI burden, it can also increase your home loan eligibility due to the reduced EMI/NMI (Net Monthly Income) ratio. Use online EMI calculators to find out your optimum loan tenure based on your repayment capacity before starting your home loan applications. As longer loan tenure increases your overall interest cost, consider making prepayments whenever you have surplus funds in future.

Compare loan offers among prospective lenders

Interest rate, processing fee, tenure and loan amount can vary widely across lenders depending on their cost of funds and their credit risk assessment of the loan applicants. For instance, many lenders opt for risk-based pricing – they offer lower interest rates and charges on home loans to applicants with higher credit scores. Some lenders also tend to set their interest rates based on the applicant's employer's profile or job profile. Hence, those planning to avail home loans should compare the home loan features offered by as many lenders as possible before submitting the loan application.