Here are six ways existing home loan borrowers can reduce their EMI amount.
1. Change your interest pricing regime
A lot of existing home borrowers are so busy with their lives that after repayment begins, they often forget to check how their EMI composition is changing.
Over the past 10 to 12 years, there have been many changes in the way banks charge interest on loans. For example, before July 1, 2010, all loans were linked to the Benchmark Prime Lending Rate (BPLR) which was then replaced by the base rate from that date. After April 1, 2016, all variable rate loans from banks were linked to the lending rate based on the marginal cost of funds (MCLR), which was then replaced by the external reference rate (EBR) from 1 October 2019. Depending on the timing of your loan disbursement, your loan will continue under the same old scheme if you have not switched to a new scheme.
Although all interest rate plans should ideally charge the same rate, in reality this does not happen. Chances are you will pay a much higher interest rate under the old regimes like BPLR, Prime Rate or MCLR compared to an EBR-linked loan. If you switch your loan to an EBR-linked loan, chances are your interest rate will go down and, therefore, your EMI as well.
For example, if you have a home loan from the Punjab National Bank (PNB) under the MCLR scheme, the minimum interest you would currently pay should be 7.3% or more, as this is their MCLR for one year. On the other hand, if you opt for a PNB Repo Linked Lending Rate (RLLR) linked loan, you can get a loan at a much lower interest rate because the bank’s RLLR is 6 .80%. Therefore, by changing the interest rate regimes, your interest rate decreases by 0.5%.
You can go to your existing bank for this change, and they may allow you to do so after charging a nominal change fee. The State Bank of India (SBI), for example, charges Rs 5,000 plus GST to switch plans.
2. Transfer your loan to a new lender
Although a home loan is offered by many banks and housing finance companies, there is a big difference in the interest rate they charge. So there’s a good chance you’ll be paying a higher EMI simply because your loan isn’t from a competitive lender. If you haven’t compared your interest rate, now is a good time to do so and check if your lender is charging a higher rate, even under EBR. Since most home loans are variable rate and there is no penalty for transferring your loan, the only cost involved will therefore be the fees charged by the new lender. If you get a competitive rate, a balance transfer can help lower your EMI.
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Bank vs HFC: Find out the lowest home loan rates for loan above Rs 30 lakh to Rs 75 lakh
3. Switch from fixed rate to variable rate
If you had taken out a fixed rate loan, chances are you would be paying a much higher interest rate throughout the life of your loan. Lenders typically charge at least 1-2% higher rate on fixed rate loans. For example, 5 years ago, while variable rate loan was available at 9% interest, fixed rate loans come with interest rates around 10.5%. And if the borrower opted for a fixed rate loan, he would be at a disadvantage in the current situation. While interest rates on the variable rate have come down to around 7%, fixed rate borrowers would still pay a higher interest rate of 10.5%.
As interest rates are currently at an all-time low, it may be wise for a fixed rate borrower to switch to a variable rate loan either with the same lender or with a different lender, as they may find the change advantageous despite the payment of a penalty on foreclosure on a fixed rate loan. In the example above, by switching to a variable rate loan, the borrower will save Rs 4,869 per month on EMI and Rs 5.85 lakh on interest payment for the remaining term.
| Save by switching from fixed rate to variable rate | ||
| unpaid loan | Rs 30 million | Rs 30 million |
| Remaining mandate | 10 years | 10 years |
| Interest rate | 10.50% | 7.50% |
| NDE | 40480 | 35611 |
| Total interest payable | Rs 18.58 lakh | Rs 12.73 lakh |
4. Make a partial prepayment and have the EMI adjusted
Borrowers of variable rate home loans have great flexibility to make a partial prepayment without any penalty that they can use to reduce their EMIs. Any partial prepayment has a significant impact on the term of your loan, as that amount is fully used to reduce the outstanding principal amount. As a result, the term of the loan decreases and the loan is repaid faster. However, if you do not wish to reduce tenure, you can ask your lender to reduce your EMI after a substantial prepayment.
5. Opt for a term extension
If you are facing some kind of financial stress and want to get relief by reducing the EMI of your home loan, you may consider extending the term of your loan. For example, if you have 10 years left on your outstanding home loan of Rs 40 lakh at 7.5%, extending the term to 20 years can help reduce your EMI by Rs 15,257.
| Reduce NDEs by extending remaining time | |||
| Extension of term | Former EMI (Rs) | New EMI (Rs) | Reduction (RS) |
| 10 years to 15 years | 47481 | 37080 | 10401 |
| 10 years to 20 years | 47481 | 32224 | 15257 |
| 15 to 20 years old | 37080 | 32224 | 4856 |
| 15 to 25 years old | 37080 | 29560 | 7520 |
| 20 to 25 years old | 32224 | 29560 | 2664 |
| 20 to 30 years old | 32224 | 27969 | 4255 |
| For an outstanding home loan 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 a maximum term until the borrower reaches age 60. Thus, a 45-year-old borrower may not be able to extend the term beyond 15 years.
Additionally, you should also remember that the longer your loan term, the higher your interest expense will be. Although you can use the term extension option as a short-term temporary measure, however, as your finances improve, you should either reinstate the old term or make a partial prepayment to expedite the repayment.
6. Use loan restructuring offered by RBI
The ongoing pandemic has thrown many people into financial hardship, where they are struggling to make ends meet. Many of these borrowers are struggling to temporarily pay their EMIs. These borrowers can approach their lender and opt for a moratorium. A moratorium cancels the EMIs or principal part for a period of time and restructures the loan to an appropriate repayment plan thereafter. However, remember that to receive this benefit, there should be no default on your loan before March 31, 2021, and you can apply for this relief before September 30, 2021. Also, when you opt for a moratorium, you must remember that the interest will continue to accrue during the relief period and the total amount you will have to pay will be much higher.
