How to Minimize Home Loan EMIs Even if Lenders Do Not Reduce Interest Rates?

Banks haven’t reduced home loan interest rates even though the Reserve Bank of India, the Central Bank in India, has cut benchmark interest rates several times. As of 3^rd June 2019, the RBI repo rate was 6%. The repo rate was 6.50% on 5^th December 2018 and 6.25% as of 7^th February 2019.

A cut in repo rates means banks must reduce MCLR rate, which stands for Marginal Cost of Funds based Lending Rate. MCLR is the minimum rate below which banks don’t lend. The monetary policy of the RBI boosts economic growth and controls inflation in India.

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See Also: Home Loan EMI Calculator

How to Minimize Home Loan EMIs Even if Lenders do Not Reduce Interest Rates?

Why are Banks Not Reducing MCLR in Sync with the RBI?

While the RBI has cut repo rate by 50 bps in the last few months, most banks have decreased MCLR by just 5-10 bps. Why?

• The cost of raising funds is high. So, banks can’t cut MCLR.
• For many retail banks, the rates of interest on savings and current accounts remained unrevised.
• There has been a disparity between deposits and loans.

See Also: Tips For Home Loan EMI Repayment

Tips for Home Loan Buyers to Reduce EMIs

If you are buying a house, find your own strategy to reduce EMIs as banks are not interested in cutting home loan interest rates. If you are a first-time loan seeker, get the lowest rate by approaching several banks. If you have already availed a home loan:

• Verify the home loan rate and also the regime. The concept of MCLR was introduced in April 2016 in India and therefore, all the previous rates were higher.
• Check interest rates offered by other banks. Opt for home loan balance transfer if some banks are offering you a competitive rate.
• New lenders normally levy a processing fee. Consider this fee if you’re shifting the loan and make a cost-effective decision.
• The remaining loan tenure and the outstanding loan amount have to be considered. Do not transfer the loan if the outstanding loan amount and the remaining tenure are low.
• Consult a financial advisor or a relationship manager for the right advice.
• Negotiate for a lower interest rate, if you are a privileged customer.

See Also: Mortgage Loan Calculator

How Do Prepayments Help You Save On Interest Rates?

If you have surplus funds, you may choose to prepay the home loan. Prepayments are useful and help reduce the home loan interest rate burden. If you have availed a home loan of Rs 40 Lakh for 15 years at an interest rate of 9.65%, the EMI and the overall interest payment come to around Rs 42,131 and Rs 35.83 Lakh respectively.

If you prepay Rs 10,000 a month for the first 3 years along with your regular EMIs, the total interest outflow falls by Rs 8 Lakh which is a huge saving. The home loan tenure reduces to 12.75 years from 15 years. The funds for prepayment can be arranged if you spend wisely. Consider various factors like income from other sources or investments, home loan interest rates, tax deduction and prepayment charges before making prepayments.

See Also: Home Loan Interest Rates

Investments vs Prepayments

Prepaying helps save on home loan interest rates. But, you have to consider the opportunity cost. For instance, if you spare Rs 10,000 a month on prepayment, the opportunity cost of Rs 10,000 is the returns you could have earned, elsewhere. Loan rates are normally higher than interest on fixed income securities and equity investments are high risk. Prepaying is a wise idea.

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