Taking a traditional Home Loan is one of the greatest financial investment you will ever make. Your Home Loan EMI (equated monthly installment) needs to be paid for a minimum of ten years. It is often the largest monthly expense for most people. As a result, most borrowers are always looking for ways to reduce their Home Loan.
Here are a few tips that will help you tackle your Home Loan repayment.
Opt for MCLR
Banks and financial institutions recently decided to reduce interest rates. However, both borrowers and the Reserve Bank of India have accused these lenders of neglecting the needs and preferences of existing borrowers. To manage this dispute, the Reserve Bank of India has made it mandatory for banks to switch to the Marginal Cost Based Lending Rate (MCLR) since April 2016.
All new banks are creating loans on MCLR. If you are an existing borrower, you still have the freedom to switch to MCLR.
The repossession rate is taken into account while calculating the MCLR. This better mirrors the alterations in the policy rates than earlier base rate systems and BPLR (Benchmark Prime Lending Rate). The MCLR requires the banks to review their respective lending rates each month. They need re-evaluate the interest rates once in a year. Moreover, the date of resetting the interest rate must be communicated to the borrowers while disbursing the loan.
This feature has made the MCLR-based Home Loan EMI rate much more transparent than the previous method for setting the interest rate. In the present economic scenario, the interest rate is steadily declining. You must opt for the MCLR based rate in order to reap the benefits of rate cuts in the future.
Reset the Home Loan to a Reduced Interest Rate
The Reserve Bank of India hasn’t taken the housing finance institutions and the NBFCs (Non Banking Financial Company) under the MCLR system yet. However, if you have taken a Home Loan from any of these organisations, you can reduce your Home Loan EMI rates. You simply have to pay a minimal conversion charge. This fee can be as little as 1 percent of the outstanding principal amount.
Pay Off the Debt Before Time
Borrowers have the ability to make a Home Loan prepayment, in part or in full. Lenders are not supposed to charge any penalty for Home Loan prepayment. If you have chosen the floating rate, though, you may have to pay some charges if the loan was taken on a fixed interest rate. The charges can be up to 2 percent of the outstanding amount of Home Loan.
Therefore, it is imperative to ensure that any savings made in interest are higher than the penalty for prepayment. You’re better off not using emergency funds or investments with a rate of return higher than the interest on your Home Loan. Close savings accounts or other security deposits that generate a lower rate of returns than the interest on the Home Loan.
Increase the Home Loan EMI
Your monthly income plays a critical role when lenders set your EMIs. In most instances, lending institutions prefer the Home Loan EMI to be less than 40 percent of your monthly income. Let’s say you wish to pay more than 40 percent on your monthly income. In this case, you must prove to the bank that you have substantial savings, or the ability to cover day-to-day expenses from other income sources.
Opt for Home Loan Balance Transfer
If you want, you can transfer the entire outstanding balance to another lender at a reduced rate of interest. Opt for Home Loan Balance Transfer if the existing lending institution declines your appeal of reducing the rate of interest. If you have taken credit from banks, you may switch to housing finance companies or NBFCs for getting the MCLR based rate of interest.