When we think of borrowing a home loan the first thing that comes in our mind is EMI’s. EMI’s are the equal monthly installments that we pay towards the repayment of home loan. The home loan EMI’s are calculated after estimating the capability of bearing the monthly burden.
The EMI’s are estimated and calculated for the fixed home loan amount for a fixed period at a fixed interest rate. The term “equal or equated” does not mean that the installments for the complete life of the loan will not change. The EMI’s do change over the period of time and there are many factors that force for the same.
Change of interest rate during the loan tenor
The change in interest rate definitely affects the home loan EMI’s. The effect may be either positive, negative or may be not at all. If the interest rate on your home loan is a floating interest rate, the EMI’s of your home loan will change as per the fluctuations in the market lending rates. Whenever the interest rates of Banks are changed by reserve bank of India (RBI), the EMI’s of your home loan tend to change too. If you think that opting a floating rate of interest is risky that you must opt for fixed rate of interest. Though the fixed home loan interest rates are not offered by all the lenders and also to keep in mind that the fixed interest rates do not remain fixed for the whole life of the loan. the lender can always be requested for certain changes in your home loan during the period to meet the changes in your EMI’s.
Change of home loan tenor
EMI’s tend to change even with changes made in the home loan tenor. EMI’s are lower when the loan tenor is higher and with a shorter tenor EMI’s tend to be higher. However, you have to understand that higher loan tenor means more amount to be paid towards interest of your home loan that in turn increase the cost of the credit.
Pre-payment of your home loan
All Banks/ NBFC’s allow the borrower to prepay or make an extra payment towards the home loan. This helps to lower the outstanding principal amount and also the burden of interest. Though, your lender may charge you some extra amount as a penalty towards the prepayment of the outstanding amount depending on the terms and conditions. So, it’s important to check the prepayment charges before signing the agreement with your lender. If the interest is higher that you have to pay towards the interest than the returns on your investments, it is advised to use those funds to pre-pay your home loan amount.
Step-up or Step-down method of repayment
Borrowers can discuss with their lenders and choose the repayment options depending on the inflow of income. This states that, a step-up option of repayment is beneficial for those who are in their initial years of career, as their income inflow is assumed to increase with every rising step in the corporate ladder. Whereas, the step-down option of repayment is convenient for those who are to their retirement. The EMI’s tend to change with such repayment options.
The EMI’s also change if the borrower opts to shift the present home loan to the new lender; the process is known as Balance transfer of home loan. In fact, the home loan borrowers mostly move to the new financial institutions to avail the best available interest rates. Many borrowers also opt for top-up along with balance transfer of the home loan. Balance transfer and the top-up together changes the EMI on your home loan.