Why is it important to pay your EMIs on time?

Banks frontload interest repayment and hence in the initial few years of a home loan, the majority of the borrower’s EMI is the ‘interest’ component while the ‘principal’ component increases only in the later years.

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While balance transfer gives you savings on your EMI or lowers your loan duration it is critical that you leverage it at the right time.

Equated Monthly Instalments, or EMIs as they are popularly called, are a great way of buying big with limited leverage on your savings. Of course, it gets used and even abused in buying consumer durables and at times things that we do not quite need.
Having said that, Pramod Kathuria- CoFounder and CEO, Easiloan, says, “One of its greatest use-cases is buying a home by availing a home loan and repaying every month across 10-30 years. A time-frame that allows one to pay the same amount while increasing one’s income (natural growth curve assumed) and owning the dream home from Day 1.”

He further adds, “For one, the home loan provides a home buyer affordability – with which one can typically buy a home at 5X the price of what he/she can contribute towards it. And to make matters simpler, the borrower repays every month, thus getting the ability to manage the EMI as part of his/her monthly income.”

Any EMI has 2 components – Principal and Interest. The principal is one’s loan amount and interest is applied to it in a compounded way. However, banks frontload interest repayment and hence in the initial few years of a home loan, the majority of the borrower’s EMI is the ‘interest’ component while the ‘principal’ component increases only in the later years. Kathuria explains, “This is their way of ensuring that they maximize their returns upfront. As a consequence, this also makes a loan last longer.”

What’s a quick fix then? Here is what you can do for your first home loan;

o   Pay your EMIs punctually
o   In parallel, save consciously for smaller principal pre-payments
o   When the corpus is big enough and if you can add some income from house rent and annual bonus payment, use it to pre-pay parts of the loan
o   As a result, your EMI will reduce from subsequent months.
o   At times, you can opt for ‘no change’ in EMI and instead reduce a few months of your loan tenure

At what stage of your tenure one should opt for a balance transfer?

With the home loan rate of interest hovering around 7 per cent, and even below, experts say it is an ideal time to opt for a balance transfer. Kathuria says, “This is a great time to opt for a balance transfer especially for anyone who has bought a home loan in the last 5 years or so and still has a significant tenure left.”

He further explains, “Home loan interest rates are at a 10-year low and have been on a declining trend. While there can always be an upward fluctuation which is difficult to predict, in recent, there hasn’t been a better opportunity for a balance transfer.”

While balance transfer gives you savings on your EMI or lowers your loan duration it is critical that you leverage it at the right time. Note that a transfer process incurs some charges, paperwork, and also the risk of potential hidden costs from the new lender. Experts suggest borrowers opt for this when they have a substantial outstanding amount/ duration of at least 10 years left in their home loan and are getting a much better deal from another lender. “Your loan balance is a mix of principal and interest and interest repayment is always frontloaded by the lender. Hence, you get maximum savings from a balance transfer only when you have a significant outstanding. So if you are at this stage of your loan repayment, go for it,” says Kathuria.

Having said that, the timing is critical and you should opt for a balance transfer when you are in the first half of your loan tenure. Additionally, always work out the time and charges that you will have to invest in the process against the savings. A host of balance transfer calculators provided by banks and lenders can help with that. Once you have a lender in mind, experts say always do a thorough check on their customer experience from relevant borrowers in your network.

Kathuria adds, “The key things to determine here are potential hidden charges, flexibility to quickly respond to changes in rates and ease of documentation for the transfer process. Also, it helps if a borrower’s home against which this loan is taken is an ‘APF approved project’ by the target lender. This accelerates your transfer process.”

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