Despite the global economic crisis, quarterly numbers indicate Q3 2020 saw housing sales increase by 2.3X compared to Q2 2020, amounting to Rs.29,731 crore. This boost is likely due to RBI Monetary Policy Committee’s decision to keep the repo rates unchanged at a historic low of 4%, making it enticing for prospective homebuyers to make the most out of the situation.
As such, a home loan can be an exceptional vehicle to finance the purchase of the house of your dreams. However, since it is a long-term credit, certain situations may arise when repaying the EMIs can strain monthly finances.
How to reduce home loan EMI burden in 2021?
For long term commitments like home loans, several factors like interest repayment can significantly influence your monthly outgo. So, here is a rundown of financial strategies that both new and existing borrowers can implement to reduce the burden of monthly instalments over the loan tenor efficiently.
1. Plan For a long Tenor With Part-Prepayment
As per the latest index to RBI circulars, it has been clarified that financial institutes cannot charge prepayment penalties on floating rate term loans. With a bit of economic foresight, this rule can be utilised to maximise savings and reduce stress on monthly finances.
Typically, long tenor directly equals lower monthly EMI, albeit higher total interest outgo to the lender. Before availing a long-term credit, chalk out your upcoming liabilities and prepare a prepayment plan accordingly.
Now, every 3-4 years, keep making part-prepayments depending on the financial capacity and readjust the loan tenor. In this way, earlier EMI payments will be lower, and you can later adjust the monthly outgo based on your disposable income. An EMI calculator for home loan should help you plan the repayment and reduce the monthly monetary stress.
2. Make a Higher Down Payment
Financial institutions finance up to 80% of a property’s current market value as a home loan, the rest has to be borne by borrowers in the form of down payment. This value that a lender finances is referred to as the LTV ratio.
As a general rule of thumb, higher down payment means lower loan principal, effectively reducing the monthly EMI outgo. Additionally, your home loan eligibility will shoot up instantly if you apply for an advance with a lower LTV, as the risk of the borrower defaulting is reduced significantly.
3. Negotiate terms with the Lender
Lenders appreciate responsible borrowing behaviour. So, if you have made previous repayments on time and have a CIBIL score above 750 (preferably close to 800), you are likely to land better deals with lower interest rates.
If not, you can negotiate the service terms with your lender, provided you have a maintained a good relationship with those in charge. Additionally, keep an eye on special offers offered by lenders to existing customers.
4. Share the EMI Burden a Co-borrower
If the monthly outgo is likely to stain your finances, consider applying for a joint home loan.
In case the borrowers are co-owners of the property, the income of both co-applicants is considered when determining the home loan eligibility. Moreover, in certain states, female co-borrowers can avail stamp duty concessions eligible for tax deductions under the IT Act. Additionally, some lenders may offer discounted interest rates in case of female co-owners.
Leading HFCs help to speed up the loan application process by providing customised pre-approved offers that require minimal documentation for approval. These offers can be claimed on products like home loans and loans against property. You can check your pre-approved offer by entering a few essential details like name and contact details.
5. Avail Home Loan Balance transfer Facility
If you feel that the current interest rate charged by the financial institution is on the costlier side, you can transfer the remaining principal to another lender at a favourable interest rate. Since the interest rates are at a historic low due to unchanged repo rates, you might be able to save a significant amount throughout the tenor.
Refinancing a home loan can be extremely beneficial in the early stages when the interest component is higher than the principal amount in the EMI.
However, before making the shift, thoroughly compare the interest rates and calculate how much the difference affects your monthly EMI repayments. This will allow you to tap into the benefits of calculating EMIs before taking a loan.
Additional Tip to maximise saving: Claim IT Deductions under the new regime
Union Budget 2021 saw the Finance Minister extend tax exemptions on term loans that can be claimed in a financial year under Section 80EEA of the Income Tax Act. This deduction of Rs.1.5 lakh can be claimed up and over the Rs.2 lakh deduction under Section 24B of this Act.
Therefore, you can claim a total of Rs.3.5 lakh in tax exemption on home loan in a financial year, which should help reduce the financial strain of a long-term credit line significantly. Make sure you are thoroughly acquainted with methods of saving tax when you take a home loan.
As a prospective homebuyer, a smart move on your part will be to explore the market and compare the home loan interest rates charged by various lenders. Adequate financial planning at the very outset will prevent you from making an expensive mistake, and you can enjoy special market advantages without stressing your monthly finances.
