Here six ways existing home loan borrowers can reduce their EMI amount.
1. Change your interest pricing regimen
A large segment of existing home loan borrowers get so busy with their lives that after repayment starts that they often forget to check how the composition of their EMI is changing.
Over the past 10-12 year, there have been many changes in the way banks charge interest on loans. For instance, before July 1, 2010, all loans were linked to the Benchmark Prime Lending Rate (BPLR) which was then changed to the base rate from this date. After April 1, 2016 all floating rate loans of banks were linked to the Marginal Cost of Funds Based Lending Rate (MCLR), which was then changed to External Benchmark Rate (EBR) from October 1, 2019. Depending on the timing of your loan disbursement, your loan would be continuing in same old regime if you have not switched to a new regime.
Though all interest rate regimes should ideally charge the same rate, in reality it does not happen. The chances are you may be paying a much higher interest rate under old regimes like BPLR, base rate or MCLR compared to a loan linked to the EBR. If you shift your loan to an EBR-linked loan, then there is good chance that your interest rate would come down and hence, your EMI as well.
For instance, if you have a home loan from
(PNB) under the MCLR regime, then the minimum interest that you would be paying currently should be 7.3% or above as this is their MCLR for one year. On the other hand, if you go for Repo Linked Lending Rate (RLLR) linked loan from PNB then you can get a loan at a much lower interest rate as the bank’s RLLR is 6.80%. Therefore, by shifting interest rate regimes, your interest rate reduces by 0.5%.
You can approach your existing bank for this shift, and they may allow you to do so after charging a nominal switching fee. The
(SBI) for instance charges Rs 5,000 plus GST for switching regimes.
2. Transfer your loan to a new lender
Though a home loan is offered by many banks and housing finance companies, there is a big difference in the interest rate that they charge. So, there is a good chance that you may be paying a higher EMI just because your loan is not from a competitive lender. If you have not compared your interest rate, then it is a high time that you do so and check if your lender is charging a higher rate even under EBR. Since most of the home loans are on floating rate basis and there is no penalty on shifting your loan, therefore the only cost involved will be the fee charged by new lender. If you get a competitive rate, a balance transfer may help you bring down your EMI.
Also Read:
Bank vs HFCs: Find out lowest home loan rates for loan above Rs 30 lakh to Rs 75 lakh
3. Move from fixed to floating rate
If you had taken a fixed rate loan the chances are that you may be paying a much higher interest rate throughout your loan tenure. Lenders typically charge at least 1-2% higher rate on fixed rate loans. For instance, 5 years ago, if the floating rate loan was available at 9% interest, fixed rate loans come with interest rates of around 10.5%. And if the borrower opted for a fixed rate loan, he would be at a disadvantage in the current situation. While the interest rates on floating rate have come down to around 7%, fixed rate borrowers would still be paying higher interest rate of 10.5%.
As interest rates are currently at a historic low level, it may make sense for a fixed rate borrower to switch to a floating rate loan either with the same lender or with another lender, as they may find the shift beneficial despite paying a penalty on foreclosing a fixed rate loan. In the above example, by switching to a floating rate loan the borrower will save Rs 4,869 per month on EMIs and Rs 5.85 lakh on interest payment during remaining tenure.
| Saving by moving from fixed to floating rate | ||
| Outstanding Loan | Rs 30 lakh | Rs 30 lakh |
| Remaining Tenure | 10 years | 10 years |
| Interest rate | 10.50% | 7.50% |
| EMI | 40480 | 35611 |
| Total Interest Payable | Rs 18.58 lakh | Rs 12.73 lakh |
4. Make partial prepayment and get the EMI adjusted
Floating rate home loan borrowers have great flexibility of making partial prepayment without any penalty which they can utilise to reduce their EMIs. Any partial prepayment has significant impact on your loan tenure as this amount is completely utilised towards bringing down the outstanding principal amount. As a result the tenure of the loan comes down and loan gets repaid faster. However, if you do not wish to reduce the tenure you can ask your lender to reduce your EMI after substantial prepayment.
5. Go for tenure extension
If you are facing any sort of financial stress and want to get some relief by reducing your home loan EMI, then you may consider extending the tenure of your loan. For instance, if you have 10 years left on your home loan outstanding of Rs 40 lakh at 7.5%, then extending the tenure to 20 years can help you reduce your EMI by Rs 15,257.
| Reducing EMI by extending the remaining tenure | |||
| Tenure Extension | Old EMI (Rs) | New EMI (Rs) | Reduction (Rs) |
| 10 years to 15 years | 47481 | 37080 | 10401 |
| 10 years to 20 years | 47481 | 32224 | 15257 |
| 15 years to 20 years | 37080 | 32224 | 4856 |
| 15 years to 25 years | 37080 | 29560 | 7520 |
| 20 years to 25 years | 32224 | 29560 | 2664 |
| 20 years to 30 years | 32224 | 27969 | 4255 |
| For a home loan outstanding of Rs 40 lakh at 7.5% | |||
However, this option may not work for all borrowers especially the borrower who is close to retirement age. Most lenders offer maximum tenure till the borrower turns 60 years old. So a borrower at the age of 45 may not be able extend the tenure beyond 15 years.
Moreover, you also need to remember that longer the tenure of your loan, higher will be your interest outgo. While you can use the tenure extension option as short-term temporary measure, however as your finances improve, you should either restore the old tenure or make partial prepayment to accelerate the repayment.
6. Use loan restructuring offered by RBI
The ongoing pandemic has pushed many people into financial stress and where are finding it difficult to make ends meet. Many such borrowers are finding it difficult to pay their EMIs temporarily. Such borrowers can approach their lender and opt for a moratorium. A moratorium waives off EMIs or principal part for some time and restructures the loan to a suitable repayment regime thereafter. However, do remember that to avail this benefit there should not be any default on your loan till March 31, 2021, and you can apply for this relief by September 30, 2021. Moreover, when going for moratorium you must remember that interest will keep accruing during the relief period and the total amount that you will have to pay, will be much higher.
