Home Loans EMI - How to save on your EMI?

Simple Tips & Suggestions to save thousands on your Home Loan

by admin Updated: 21 Jan, 2021, 17:21 IST
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Having a home loan and finding it harder to pay your regular EMI due to salary cuts or loss in business or personal income? Covid-19 has bought forward some of the most unexpected financial planning problems and you are not alone, if you are facing problems or struggling to pay your Home Loan EMIs. We have highlighted many ways using which you can manage your EMI better and stay on top of your Credit Score and keep your Credit history clean.

The “Debt Trap” is the worst thing you would want to get into during this recession-like situation as interest rates can quickly pile up along with Late Fees, Penalty etc making a very horrendous situation to be in. We have put down concrete steps and suggestions and we assure you that it will be well spent 90 minutes to get things in order and save *Lakhs of Rupees* over the next 10-15 years.



The Basic Elements of Home Loan

Every Home loan EMI has 2 components - Principal and Interest Component. In the earlier years of your loan, you end up paying a higher interest component and a much lower principal component. As your principal keeps reducing, your interest component also keeps going down. The Home Loan is given to you for a fixed number of years, often called “Loan Tenure”. And the final element which matters the most is Interest Rate or Home Loan Rate. Interest rate can either be Fixed rate or Floating rate. Fixed rate means that your interest rate would stay the same irregardless of any changes by RBI. Floating Rate usually means that your interest rates are revised every quarter based on the Repo rate (Rate decided by RBI). All these basic elements are linked to each other and you need to understand these elements first by downloading your latest Home Loan statement.

  • EMI amount
  • Original Loan Tenure
  • Balance Loan Tenure
  • Interest Rate
  • Principal Component vs Interest Component

If you start repaying a higher amount compared to your EMI, your loan Tenure automatically decreases and so does your future interest (as you are paying off additional principal). Similarly, if the interest rate is reduced on your loan and you continue to pay original EMI, your remaining loan tenure decreases at a faster rate.

Interest Rates are Falling Down, Falling Down…. Call your Bank!

If you read news regularly, you might be aware that RBI has been aggressively cutting down Repo Rates every month to bring in more liquidity in Indian market, given the recession-like situation. In May 2020, RBI cut the repo rate from 4.4 percent to 4 percent. That’s a 40 basis point rate cut. This follows the rate reduction of 25 basis points mid-April and 75 basis points on March 27. However, these rate cuts are meant for Banks and All Banks will not aggressively pass the same rate cuts to all customers.

You will have to do some work! Banks would obviously like to make some money. While they may quickly hike interest rates when Repo rates are increased, It’s very common for Banks to delay when it comes to slashing interest rates and pass on the benefits to customers. The usual strategy of Private banks is to slowly watch PSU Banks like SBI etc for rate cuts and then they follow the foot-steps, earning good interest meanwhile.

Let’s understand the maths first behind the rate cut and how a 0.25% lower interest rate can help you to save Lakhs of rupees over the entire loan tenure.

Let's assume that you have taken a Home Loan of 50 Lakh rupees for a tenure of 25 years and your current interest rate is 7.75%. If you switch to a bank offering 7.35% interest rate or convince your existing bank to give you a lower interest rate, You end up saving Rs. 3,91,000. Yes, A whopping Rs. 3.9 Lakh is straight in your pocket smile


A wise Dimer "@nhavale":https://www.desidime.com/users/85388 also shared a very important thing in comments: One can reduce tenure also if EMI is affordable and that can save upto Rs. 10.23 Lakh in above example. So, if you are keeping money in FD, then obviously you must reduce tenure and pay away as much as you can.


So, Do some homework on popular websites like Bank Bazaar or SwitchMe and Call your bank and explain to them how you are getting lower rates with other banks and you are considering switching the Home Loan. No bank would like to lose a good customer and they would generally give you the best possible rates. It may not be exactly the same as the lowest available on BankBazaar but you must also consider switching costs etc. It’s not advisable to switch banks or do balance transfer until you are saving more than 1% in interest rate.

Also, Do not forget that it's not a one-time exercise. You need to analyze/research this every 6 months and you are bound to save some serious money!

Switch home loan to MCLR (marginal cost of funds-based lending rate) regime

If you had taken Home Loan after July 1, 2010 but before April 1, 2016, then there is a very high likelihood that your Loan rate is linked to Lending Bank’s Base Rate. If you are under the Base Rate Regime, it's likely that your interest rate might be upwards of 10%.

A new regime of lending called marginal cost of funds based lending rate (MCLR) was announced and implemented by RBI for all loans, including Home Loans, disbursed after April 1 2016. The new MCLR regime makes it compulsory for the Banks to pass on rate changes to customers faster without any request by the customer. One of the most favourable decision made by RBI keeping end-consumers in mind.

So now you must be wondering, Can I not take benefits of MCLR if I took Home Loan before 2016? Do I need to call the Bank every 6 months? RBI in its guidelines have made it very clear that customers must be allowed to switch to MCLR from Base Rate without paying any additional Fees. So you have full legal right to switch your home loan to MCLR rate by just calling the bank and requesting the same. All Banking executives are normally aware about it and they will guide you. Obviously, you must only do this if your existing rate is higher than MCLR Rate.

MCLR rates are released by RBI every month here or you can also see the MCLR rates for popular banks on BankBazaar.

If your loan is in the BPLR (Benchmark Prime Lending Rate) regime, you can still call and switch to MCLR rate if it makes sense financially. Simply ask your banker about the current MCLR rate vs your interest rate and they will always guide you.

If you had taken a loan from a Housing Finance Company (HFC) and not a bank, then as per RBI regulations, HFC are not obliged to switch customers to MCLR. In such cases, you can consider doing your Balance Transfer to another bank and there are many websites like BankBazaar or SwitchMe to help you transfer.

The risk with MCLR is that in events of rapidly falling interest rates, the banks may reset the interest rate after 12 months if it's linked to the 12 month MCLR rate. So one need to negotiate to link their loan to quarterly or 6 months MCLR to really avail the benefits.



Consider to Opt for Home Loan Overdraft Facility.

If you are not salaried and running a business, there is a likelihood that your income is not steady and keeps varying every month. In such cases, it often happens that during your good business months, you might be over-spending on luxuries or discretionary spends. Or you might simply be depositing the money in FD while paying a higher interest rate for your Home Loan. During an unplanned crisis like Covid19 or say floods or earthquakes or simply cyclical nature of your business, one can experience a huge drop in business income. If the above resonates with you, then you must consider opting for Home Loan Overdraft Facility. In simple terms, You simply pay more than your EMI amount during your good months and the excess amount paid is deposited in the Overdraft account. The amount also offsets your principal amount which helps you to keep reducing your Interest component every month or total interest payable.

During a crisis or say a bad few months, you can also withdraw the overdraft money to support you and your family. The overdraft money can also be used to pay EMI after withdrawal in case you are struggling with your EMI payments too. The beauty of Home Loan Overdraft Facility is the discipline it brings to you to prepare for worst-case scenarios like Lockdowns where we saw many businesses going to Zero revenue overnight.

Suppose you have a Home Loan of 25 Lakhs for 25 years at 8% Interest rate and you have availed Home Loan Overdraft Facility. Your monthly EMI would be Rs. 19,295. Here is how an Overdraft facility looks like:



Above from helping during tough times, the Overdraft Balance also offsets your principal by the same amount. So essentially, you are paying lesser interest or replaying your loan faster smile

While it sounds all exciting, Do not jump for Overdraft Balance facility unless you have a very varying income stream. The interest rate of Home Loan with Overdraft Balance facility is +slightly higher+ than a conventional Home Loan. So one needs to do some calculations on an excel to figure out the true benefits of such a Facility. Also all banks have different variations in Interest rates.

Source: BankBazaar, May 2020

Home Loan Prepayment - Use every opportunity

This is one of the most powerful weapons in your arsenal to reduce or eliminate your Future EMIs. The biggest hack is to prepay as much as possible in your earlier years of Home loan. If you are able to knock down your principal component in the first 5 years of your home loan, you can save upto 50% on your total interest payable.

Obviously one should only prepay aggressively after the individual has enough savings or emergency funds available. Every opportunity to prepay must be looked at. Are you creating a Fixed deposit as you don’t have ideas to invest? Consider prepaying the amount as your FD interest rate will always be lower than your Home Loan interest rate.

Got an unexpected annual bonus from the company for all your hard work apart from your regular Salary? A very good business month? Avoid discretionary spending and consider the Home loan pre-payment. Salary hike of 20%? Why not pay 5% extra EMI every month from additional salary.

Be very aggressive with pre-payments in first 5 years of Loan Tenure.

Let me explain how this can be done with an example. Say you availed a home loan of Rs 25 lakh at 8% p.a. for a tenure of 25 years. Every year you managed to pay Rs. 40,000 as pre-payment for the first 5 years. This would lead to overall interest saving of Rs 6,03,264 and reduction of loan tenure from 270 months (25 years) to 241 months, i.e., a reduction of 29 months.



We hope that the above suggestions help you to better manage your Home Loan and save on your Future EMIs. Spend a good 2-3 hours every 6 months to research and evaluate your options and don’t forget to call your banker. You would be very surprised to learn that you save a couple of Lakhs by just giving a phone call.

Do share with us your experiences in the comments below.

91 Comments  |  
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Deal Newbie
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Well Explained

Missing
Deal Cadet
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Mclr and repo rate both are different ? If yes then what is advisable ? Switch to mclr or repo rate ? TIA

Missing
Deal Newbie
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Thanks

Missing
Admin
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sweetestone.k92998 wrote:

Mclr and repo rate both are different ? If yes then what is advisable ? Switch to mclr or repo rate ? TIA

Hi, Am assuming you are referring to RLLR (Repo based home loan rate). So MCLR is usually lower than RLLR but RLLR is more transparent as it gets revised every month and beneficial right now due to reducing interest rates… It also means it will increase faster when rates will climb up.

I have a Home Loan with Citibank and I have something called as CMPR which is “Citibank Mortgage Prime Rate”. My current interest rate is 5.3%. My point is that first try to negotiate very hard in whichever interest regime your home loan is. Obviously you can compare the different interest rates for different regimes but end of the day, what really matters is how much you negotiate, otherwise u will always be put in higher interest rate of the slab bank offers to customers.

Missing
Deal Cadet
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Stop non essential expenses like mobile, tv, car, gadgets, expensive vacations and prepay principal amount
Live minimalist life for 4-5 years

Missing
Deal Cadet
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admin wrote:

Hi, Am assuming you are referring to RLLR (Repo based home loan rate). So MCLR is usually lower than RLLR but RLLR is more transparent as it gets revised every month and beneficial right now due to reducing interest rates… It also means it will increase faster when rates will climb up.

I have a Home Loan with Citibank and I have something called as CMPR which is “Citibank Mortgage Prime Rate”. My current interest rate is 5.3%. My point is that first try to negotiate very hard in whichever interest regime your home loan is. Obviously you can compare the different interest rates for different regimes but end of the day, what really matters is how much you negotiate, otherwise u will always be put in higher interest rate of the slab bank offers to customers.

@admin your interest rate is 5.3% ? R u double sure?
Btw Very informative post thanks you..

Missing
Deal Cadet
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what about consumer durable emi? Any news on moratorium?

Missing
Deal Cadet
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My interest rate is 7.2% in icici

Missing
Deal Cadet
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Thanks for sharing.

Missing
Deal Newbie
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Great and excellent post

Missing
Deal Cadet
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--AJ-- wrote:

My interest rate is 7.2% in icici

Mine is at 7.4% with ICICI cry

Missing
Deal Subedar
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I have a home loan with axis bank and received this sms in April. After that no revision done.
“Dear customer, MCLR reset effect has been passed on to your loan a/c no. XXX. Your revised ROI is 8.00 % wef 18-04-2020. Thank you.”
Please suggest if anything better can be done.

Missing
Admin
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ddstar wrote:

@admin your interest rate is 5.3% ? R u double sure?
Btw Very informative post thanks you..

yes, I get that question a lot. smile

Missing
Admin
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rohan8397 wrote:

I have a home loan with axis bank and received this sms in April. After that no revision done.
“Dear customer, MCLR reset effect has been passed on to your loan a/c no. XXX. Your revised ROI is 8.00 % wef 18-04-2020. Thank you.”
Please suggest if anything better can be done.

As suggested in article, Check other Loan options. Call the bank and negotiate… Tell them that you will switch, if you are not offered better interest rates… Convince them that you pay on time, you are good customer and you dont want to switch for few basis points but bank has to make it little better. Repeat every quarter.

Even if you get 0.1% to 0.2% down, You can be rest assured that you have got the sweetest deal (maybe 10-15 loots of Desidime wink )

Missing
Deal Newbie
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It is very helpful

Missing
Deal Newbie
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are you Citi Gold / private client ?

Missing
Deal Newbie
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admin wrote:

yes, I get that question a lot. smile

are you Citi Gold / private client ?

Missing
Admin
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aDesiBaba wrote:

are you Citi Gold / private client ?

No buddy, just a regular customer. No savings account etc or anything there smile

Missing
Deal Subedar
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Very informative. Thanks smile

Missing
Deal Subedar
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admin wrote:

No buddy, just a regular customer. No savings account etc or anything there smile

Please share the contact details. Will check if we can move our loan to Citi bank (from SBI maxgain account, having 7.7% interest rate currently).

Missing
Admin
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dealyogi wrote:

Please share the contact details. Will check if we can move our loan to Citi bank (from SBI maxgain account, having 7.7% interest rate currently).

I usually talk with Citi customer care directly… no specific person.

1860 210 2484

Compare loans from other banks, then pressurise your bank to match it. I was not trying to say that Citibank offers best home loans or anything…. Its more about how hard we try to negotiate matters, in my personal experience…

Missing
Deal Subedar
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admin wrote:

I usually talk with Citi customer care directly… no specific person.

1860 210 2484

Compare loans from other banks, then pressurise your bank to match it. I was not trying to say that Citibank offers best home loans or anything…. Its more about how hard we try to negotiate matters, in my personal experience…

Got your point bro. But negotiating with SBI is next to impossible. However maxgain/overdraft facility is really very helpful in SBI and I am saving a lot in interest money just by parking extra money there. My other saving accounts not have even 5000rs balance, everything parked in overdraft account and whenever needed, just take 2 mins to transfer from overdraft to Saving account.

So I am little reluctant to change the bank. Still I sent email to SBI yesterday after checking this thread to convert my yearly MCLR to quarterly/monthly/6-Month or move MCLR to EVLR (7.55% interest rate currently). Yet to receive response.

Catch will be “processing fees” to convert any interest rate to other form, which might offset the gain, depending on the outstanding amount in loan account.

Missing
Deal Cadet
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admin wrote:

Hi, Am assuming you are referring to RLLR (Repo based home loan rate). So MCLR is usually lower than RLLR but RLLR is more transparent as it gets revised every month and beneficial right now due to reducing interest rates… It also means it will increase faster when rates will climb up.

I have a Home Loan with Citibank and I have something called as CMPR which is “Citibank Mortgage Prime Rate”. My current interest rate is 5.3%. My point is that first try to negotiate very hard in whichever interest regime your home loan is. Obviously you can compare the different interest rates for different regimes but end of the day, what really matters is how much you negotiate, otherwise u will always be put in higher interest rate of the slab bank offers to customers.

What is their deposit rate? 5.3% Interest rate is insane. Can you enlighten how you got suxh rate? Even on their website its showing interest rate starts from 7.2%

Missing
Deal Subedar
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I have couple of doubts, please clarify
1.Is it applicable for education loans? Bz i have a education loan and its interest rate is 10.5% in canara bank taken in 2015
For home loan…
2. Should we call bank customer care or the branch?
3. We have a home loan in canara bank was taken in 2009 and its present interest rate is 8.25%…can it be reduced still?

4. Is overdraft and OD account both are same?

Missing
Admin
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Rahil42 wrote:

What is their deposit rate? 5.3% Interest rate is insane. Can you enlighten how you got suxh rate? Even on their website its showing interest rate starts from 7.2%

As i explained earlier, the key is to do some research on competition using sites like https://www.switch...n/ or BankBazaar. Call them, negotiate and do such exercise once every 3 months until u don’t go in lowest slab possible… smile

Missing
Admin
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Sm2698 wrote:

I have couple of doubts, please clarify
1.Is it applicable for education loans? Bz i have a education loan and its interest rate is 10.5% in canara bank taken in 2015
For home loan…
2. Should we call bank customer care or the branch?
3. We have a home loan in canara bank was taken in 2009 and its present interest rate is 8.25%…can it be reduced still?

4. Is overdraft and OD account both are same?

1. Not sure about educational loans but no harm asking. It’s same like Mobile Data plans. If you ask/negotiate than better plans are always available to retain customers. They would not want to loose a customer for 0.2% to 0.5% but for us, it will add up to significant savings.

2. Customer care. Branch would always generally care only to get new customers.

3. Yes, for sure. Even my loan was taken in 2009 only and I use to call them often till last year.

4. yes mostly same (unless u are asking about some specific product – like savings account OD is different than Home Loan OD obviously.)

Missing
Deal Subedar
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@admin Nice share. To add to your point, which is missing your topic, also most of the bank dont tell this to customer, is to lower your tenure instead of lowering EMI amount.
This applies for both case, pre-payment or interest rate reduction.

When ever we do prepayment or get our interest rate reduce, most of the bank by default lowers the EMI amount, by keeping the tenure as it is. Because by doing this they still earn lot of money from you.
So, If you can afford the current EMI amount, its always advisable to lower your Tenure to get maximum benefit.

Here is the example from @admin s original post

View post on imgur.com
https://cdn0.desidime.com/attachments/photos/633844/medium/6889918plhkGgG.png?1598620385
h2. Its 10.2 Lacs compare to 3.9 Lacs

In My example I reduce the tenure from 300 months to 273 months (-27 Months) and see the magic. My EMI amount it same as its is.

Think wise !!!

replyuser