Home loans are a considerable financial commitment, and one of the integral aspects borrowers consider is the EMI (equated monthly installment) they will need to pay.
EMIs are the fixed monthly payments to repay the loan over the tenure. You can calculate your home loan EMI easily with an online home loan EMI calculator so you can realistically plan your finances.
There are several factors that influence the EMI amount, and understanding these factors can help you manage your loan effectively. Let’s look at them.
Loan amount
The loan amount or the principal amount you borrow is a primary factor in determining your EMI. The larger the loan amount, the higher the EMI.
The loan amount depends on the value of the property, the down payment, and any additional funds you might require for furniture or home renovations.
How to deal with it?
- Save for a higher down payment to reduce the loan amount, which in turn will lower your EMI.
- Analyze your needs carefully and only borrow the amount you truly need. Over-borrowing leads to higher EMI, which can strain your monthly budget.
Interest rate
The interest rate is one of the most crucial factors influencing home loan EMIs. lenders offer different types of interest rates, primarily floating and fixed rates.
Floating rates fluctuate according to the market conditions, whereas fixed rates remain constant throughout the loan tenure.
How to deal with it?
- Choose a fixed rate if you prefer predictability and stability in your monthly budget. Even if rates rise in the future, your EMI will remain constant.
- Study the market conditions or seek professional counsel from expert financial advisors before opting for a floating interest rate. This option is beneficial if the market interest rates are expected to fall, as this will reduce your EMI over time.
- Maintain a good credit score (750 and above) to secure a lower interest rate on your home loan.
Loan tenure
The tenure of the loan is the duration over which you will repay the loan. A longer tenure results in smaller EMIs, but it also means you will pay more interest over time. Conversely, shorter tenures have higher EMIs but less interest.
How to deal with it?
- Choose a loan tenure that aligns with your financial capacity. If you can afford higher EMIs, opt for a shorter tenure to save on interest.
Credit score
Credit score is a reflection of your ability to repay debt or creditworthiness. Lenders consider a high credit score a sign of a reliable borrower, and it can significantly impact the interest rate offered.
A low credit score means higher interest rates, leading to higher EMIs.
How to deal with it?
- Focus on improving your credit score by regularly checking your credit score and take steps to improve it, such as avoiding late payments and paying off outstanding debts.
- Avoid applying for multiple loans within a short period because multiple loan inquiries might lower your credit score.
Down payment
The down payment you make on the property impacts the loan amount and, consequently, the EMI.
Typically, lenders need a down payment ranging from 10-25% of the value of the property. A higher down payment decreases the loan amount and, therefore, the EMI.
How to deal with it?
- Save for a large down payment to reduce the loan amount. This will lower your EMI and even lead to better interest rate offers.
Prepayment penalties and charges
Prepayment refers to paying off a part of the entire loan before the tenure ends. While this can significantly reduce your interest payments and shorten the loan tenure, some lenders impose prepayment penalties, especially for fixed-rate loans.
How to deal with it?
- Negotiate the terms before finalizing the loan. Ask the lender about prepayment penalties. It would be best to opt for a loan with minimal or no prepayment charges.
Changes in repo rate
The repo rate is the interest rate at which the RBI lends to commercial banks. Fluctuations in the repo rate directly impact the interest rates on loans, especially for floating-rate loans. If there’s an increase in the repo rate, it would result in higher EMIs and vice versa.
How to deal with it?
- Monitor the economic trends to keep an eye on changes in the repo rates. If the rate is expected to rise, consider switching to a fixed-rate loan.
- If repo rate changes significantly impact your EMI, consider restructuring your loan with the lender to make it more manageable.
Loan processing and other fees
While not directly impacting the EMI, loan processing fees and other additional charges can increase the overall cost of your loan. These charges are usually a percentage of the loan amount and may include legal fees, administrative charges, and documentation charges.
How to deal with it?
- Negotiate loan terms with your lender and request for a waiver or reduction in fees to reduce the upfront cost of the loan.
- Compare loan offers from various lenders before making your final decision.
Loan-to-value ratio
The loan-to-value (LTV) ratio represents the percentage of the property value you can borrow as a home loan. A higher LTV ratio means you can borrow more, which can result in a higher EMI. A lower LTV ratio requires a larger down payment but results in a lower EMI.
How to deal with it?
- Carefully analyze the value of your property and how much down payment you can make. Use an EMI calculator to find out how much EMI you would have to pay and then make a decision.
Final thoughts
Comprehending the various factors that influence home loan EMIs can help you make informed decisions when selecting and managing your loan. By carefully considering the loan amount, interest rate, tenure, and additional fees, you can optimize your EMIs to suit your financial situation and avoid financial strain.
Additionally, maintaining a healthy credit score and staying informed about market trends will empower you to manage your home loan effectively over time.
Make sure to regularly review your loan terms and stay proactive in making adjustments, such as prepayments or switching interest rate types, to keep your EMIs manageable and aligned with your financial goals.