One of the biggest responsibilities a person can make financially is repaying a home loan. This is mainly due to the large amount of loans involved and a significantly longer tenure period for repayment. The EMI payments can drain someone financially and have a huge effect on someone's livelihood, in addition to other expenses.
In addition, based on the choices of RBI, there are several parameters such as loan repayment tenure, loan transfer, and adjustments in home loan rates. Such considerations also have the potential to impact one's monthly payments. Therefore, it is very important to carefully analyse the parameters that can impact home loan EMIs in the longer term, when preparing to use a home loan.
Changing Rates of Interest: During your loan maturity period, any improvement in the home loan interest rates can have a major substantial impact on your home loan EMI. If you have used a floating interest rate home loan, then your EMI will be impacted by the prevailing rates in the financial sector. This generally means that your home loan EMI will also be affected if the Reserve Bank of India makes any decision to make such improvements in loan rates.
This does not mean, however, that it is very expensive to use a home loan with a floating interest rate or that home loans with fixed interest rates are good.
In reality, the interest rates on home loans have dropped drastically over the last few years due to the repo rate cuts implemented by the Reserve Bank of India. A number of economic advisors recommend that home loan borrowers should go for floating rates as it does not include any pre-payment fees. Besides, a fixed home loan interest rate is not given by all lenders. You would be pleased to know that your interest rate is simply not constant for the whole loan term period, even with the fixed interest rate home loan.
Changes in the duration of Loan Term: EMIs for home loans are greatly affected by the tenure duration of the loan. As a simple rule, if your loan repayment period is longer, your loan EMI would be lower. A majority of consumers, however, fail to understand that a longer period of time for loan repayment typically means higher interest rates. Therefore, considering smaller EMIs for home loans, a person would end up paying the financial lender a greater amount. A longer period of time for repayment of loans, however, makes much more sense if the borrower is not sure of his/her financial status and does not want to risk high monthly payments.
Step-up or Step-down plans for repayment: A number of financial lenders, based on their earning potential, give their loan applicants a good range of repayment options. The Step-Up plan for repayment is the first repayment option. In this situation, at the beginning of the loan repayment tenure period, the loan EMIs are much lower, but rise over the remaining period of time. For people who have just begun their professional careers and are expecting a pay increase in the near future, this repayment choice is very suitable.
The Step-Down plan for repayment is the second repayment option. In this scenario, at the beginning of the loan repayment term period, the loan EMIs are much higher, but decrease over the remaining period. For people who are close to their retirement age or for those who want to cut some liabilities, this repayment choice is very acceptable.
Pre-Payment of the principal amount of the home loan: The financial lenders would allow the home loan borrower to make pre-payments against the loan in most cases. This helps decrease the entire amount and the interest rate related with it. However a pre-payment charge of about 1–5 %of the remaining principal may be paid to you.
It is suggested that before using the home loan, you go through some pre-payment conditions with the financial lender.
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