Applying for a home loan is a definitive way to accomplish your long-cherished dream of owning a home. But, to have a hassle-free borrowing experience, you plan your finances well so that the EMI is affordable. Read on to know more about the factors that affect the home loan EMI.
Buying a home is a life goal for many middle-class Indians. To meet their goals, most people avail a home loan. Today, with the various housing schemes like ‘Housing for all’ launched by the government of India, the number of people applying for a home loan has increased manifold. If you aspire to own a home and apply for a loan for the same, you must know that it is a long-term financial commitment. Typically, the home loan tenure varies from 10-30 years, and you must repay the amount for the said duration.
Being a long-term financial product, you must meticulously plan your finances so that the EMIs are affordable for you. You must carefully assess your current financial condition, including the income, expenses and other liabilities, and apply for the loan accordingly. Here are four critical things that affect EMI.
The loan duration is the period for which you repay the EMIs. Even a slight change can significantly impact your EMI payout in the long run. You must remember the rule of thumb, the longer the duration of the loan, the lower will be the EMI, and vice-versa. So, make sure that you assess your needs and your repayment capacity well before choosing the loan tenure. Choose a duration so that it is easy for you to repay the EMI without compromising on your other expenses.
Transfer of loan to a different lender
You may have taken a home loan from a particular lender, but over the years, if you find another lender that is offering the loan at a lower interest rate than you can shift the loan to the new lender. This process is called a home loan balance transfer. But, before you initiate the transfer, you must calculate if you will benefit from the transfer and it will have a positive impact on your home loan EMI.
The type of repayment you choose
Generally, most lenders in India provide home loan borrowers with the flexibility to choose the repayment method to suit their needs. Based on your financial condition, you can choose between step-down repayment and step-up repayment options. If you have just started working and your income is not high, you can opt for the step-up repayment option.
In step-up repayment method, the borrowers charge a lower interest rate in the initial few years of the loan, and hence the EMI is also less. However, over the years, both the interest and EMI will increase. On the other hand, with step-down repayment method, the EMI is higher in the initial years of the loan, and it reduces over time as the outstanding amount reduces. This type of repayment option is ideal if you are nearing your retirement age and wish to pay off the loan as soon as possible.
Changes in the interest rate
One of the critical factors that affect home loan EMI is the interest rate. Changes in the interest rate can have a positive or negative effect. If you have opted for a home loan with a floating interest rate, the interest rate will change based on the existing lending rate. Thus, if the lending rate increases, the EMI will increase and vice-versa. However, if you opt for a fixed-rate loan, the EMI will remain the same throughout the tenure. This means if the lending rate reduces, you still must pay high EMI.
Fixed-rate home loan can be a prudent choice if the lending rate is high, whereas, floating rate home loan would be an ideal choice if the lending rates are low. It is therefore crucial that you analyse the market condition and trends before choosing the interest type for your home loan.