Nowadays when loans are available for everything that we need to fulfill our diverse needs and desires. But when we think about any loan… we first think about Equated Monthly Instalments ( EMI). Any loan or the amount borrowed has to be repaid over the time with some interest and a fee. Especially when it comes to Home Loan we find out the estimated monthly burden we are capable of bearing.
EMI is estimated by taking into account home loan amount for a fixed tenure at a rate of interest. The term ‘equated’ does not mean that the EMI will never change. Of course, EMI can change over the course of time, and many factors influence the home loan EMI. However situations change over the time period and many factors effect and alter the EMI Amount. The factors which effect your EMI are as under
Interest rates can change multiple times during the tenure of the loan. This can impact the borrower either positively, negatively or not at all depending on the type of interest rate chosen. Different lenders (it may be banks or HFCs) offer different interest rates on loans. Further, these lenders offer different types of interest rates. Increase or decrease in general interest rates can impact your EMI.
If you have taken a loan under the floating rate of interest then your EMI may change according to the change in the rate of interest. The rate of interest on home loan changes as and when the RBI changes the bank rate. If you have opted for the fixed rate of interest then the change in bank rate may not affect you. But nowadays only a very few banks offer the fixed rate of interest. On the other hand, if you took a loan under the floating rate of interest then be ready for increase or decrease in your EMI or alternatively you may opt for the change in the loan tenure.
Whenever changes are made to the home loan tenure, EMI’s tend to change. The longer the home loan tenure, lower the EMI, and shorter the home loan period, higher the EMI. But, one should understand that longer home loan tenure means more payment of interest towards your home loan which increases your cost of credit. If negotiated for a new term loan from the current lender or switch over to a new lender with a new loan term, EMI amount would change accordingly.
When a Bank/NBFC allows to make extra payment or prepayment towards the loan by making lump sum amount. Any extra payments over and above the monthly EMI would bring down the outstanding principal amount and reduce the interest burden. After paying EMI’s for few years if you want to get rid of the burden by paying the entire amount at once, lenders usually charge some percentage (this mostly ranges from 1-3%) on the outstanding principal amount as a pre-payment penalty. On home loan taken in individual capacity RBI has come up with the total waiver on the pre-payment penalty. Even for Loan against property some lenders waive this amount if the prepayment is up to 25% of the outstanding principal amount in a financial year.
Prepayment may vary according to the reasons and the sources of the funds. If we obtain a loan from a financial institution for the prepayment, the charges are usually higher rather than when you pay from your own sources. The partial pre-payment of loan will impact on your EMI amount, you can either reduce you EMI or you can reduce the tenor of the loan keeping the EMI as same to what you have been paying earlier.
Some financial institutions offer their customers a flexible option to repay the loan amount with unequal EMI’s. These are known as step-up and step-down loan. In step up loans, the EMI’s are low initially and increases as the years roll by. In step down loan EMI’s in initial years are high and decreases as the years roll by. Step up option is convenient for the borrowers who are in their initial stage of their career and will have rise in their income as they climb up the corporate ladder. Step down option is convenient for those who are close to their retirement and are currently making good money. EMI’s change with these flexible repayment options.
Your home loan EMIs also change when you shift your home loan to a new lender (the process is called Balance Transfer of home loan). In fact, most home loan buyers move to the new lender to get the benefit of low interest rates. Many of them also opt for top-up loans on balance transfer of the home loan amount. Balance transfer plus top-up loan amount tends to change your home loan EMI.