These 4 Things can Impact your Home Loan EMI
Repaying a home loan is one of the biggest commitments an individual can make financially. This is largely due to the huge loan amount involved and a very long repayment tenure period. The EMI payments, in addition to other financial expenses, can drain anyone financially and significantly impact one’s lifestyle.
Moreover, there are various factors like loan repayment tenure, loan transfer, and changes in home loan rates based on RBI’s decisions. These factors also have the potential to influence one’s monthly payments. Therefore, while planning to avail a home loan, it is quite important to carefully scrutinize the factors which can affect the home loan EMIs in the long run.
Changing Interest Rates
Any change in the home loan interest rates during your loan tenure period can have a significant positive or negative effect on your home loan EMI. If you have availed a home loan with a floating rate of interest, then the prevalent rates in the financial market will influence your EMI. This usually implies that whenever the Reserve Bank of India takes any decision to make certain changes in the lending rates, your home loan EMI will also be affected.
However, this does not mean that availing a home loan with a floating interest rate is quite risky, or that home loans with fixed interest rates are better.
As a matter of fact, in the last few years, the interest rates on home loans have decreased significantly due to the repo rate cuts imposed by the Reserve Bank of India. A majority of the financial advisors suggest that the applicants of home loans should go for floating rates as no pre-payment penalties are involved in it. Besides, not all lenders provide a fixed home loan interest rate. You will be surprised to know that even with the fixed interest rate home loan, your interest rate is actually not constant for the entire loan tenure period.
Changes in the Loan Tenure Period
Home loan EMIs are significantly influenced by the loan tenure period. As a basic rule, your loan EMI will be lower if your loan repayment tenure is longer. However, a majority of customers fail to realise that a longer loan repayment tenure period usually implies higher interest payments. Therefore, despite smaller home loan EMIs, an individual will end up paying a higher amount to the financial lender. However, a longer loan repayment tenure period makes more sense if the applicant isn’t sure about his/her financial condition and doesn’t want to risk with high monthly payments.
Step-Up or Step-Down Repayment Plans
A majority of the financial lenders offer a good variety of repayment options to their loan applicants based on their earning capacity. The first repayment option is the Step-Up repayment plan. In this case, the loan EMIs are quite lower during the beginning of the loan repayment tenure period, but increases over the remaining period of time. This repayment option is quite suitable for individuals who have just started their professional careers and are expecting a pay hike in the near future.
The second repayment option is the Step-Down repayment plan. In this case, the loan EMIs are quite higher during the beginning of the loan repayment tenure period but decrease over the remaining period. This repayment option is quite suitable for individuals who are close to their retirement age or for those who like to cut down any liabilities.
Pre-Payment of the Home Loan Principal Amount
In a majority of cases, the financial lenders will allow the home loan applicant to make pre-payments towards the loan. This helps to reduce the principal amount and the associated interest rate. However, you might be charged a pre-payment penalty of around 1-5% of the outstanding principal.
It is recommended that you go through any pre-payment clauses with the financial lender before availing the home loan.