The banks usually frontload interest repayment, which results in payment of initial EMI of home loans as interest component, while the principal only comes in later.
Equated Monthly Instalments, or as they are popularly known, EMIs, are the best way of buying items that would disrupt your budget. That will allow you to buy without giving a lethal blow to your savings, but it is not free from abuse.
The abuse of EMI can come while buying vanity products but, it is a great way of buying a home, especially if done through a home loan.
If it is repaid every month for 10-30 years, it is good as it will not affect their income and also fulfils the dream of owning a home.
Thus, home loans help the consumer buy a home 5X the price one can afford. If the EMI is paid regularly, they can own a good home without destroying their savings.
An EMI has two components – principal and interest. While a principal is a loan amount, interest is applied in a compounded way. But the banks frontload the interest repayment that results in the borrower paying the interest component of the EMI.
The principal component of the EMI comes only later on. This is done by the lenders to maximize their returns and to make loans last long.
But there are a few ways in which one can bypass this, which is by, punctual payment of EMI, conscious savings for smaller principal pre-payments.
If the corpus is big, then add some income from house rent and annual bonus payment to pre-pay parts of the loan.
These steps will reduce EMI for subsequent months, and should opt for no change in EMI. Instead, reduce a few months in the loan tenure.
Now is the best time to take out a home loan since the interest rate is hovering around 7% and below. It is also the ideal time for a balance transfer. It is relevant and helpful for those who have taken their loan five years ago and are still paying.
The rate is at a 10-year low, with no sight of upward movement in the near future. While the balance transfer helps your EMI and, in some cases, lowers loan duration, the important factor to be on the lookout for is the right time to do it.
It also has charges in the transfer process, hidden costs and lots of paper works.
This should be done for those who have a substantial outstanding amount or a duration of 10 years should be left in the loan and should also get a better deal from the alternative. One should also get maximum savings from this transfer.
Timing is critical in this endeavour when done on the first half of tenure the better. Also, calculate the chargers behind the process and check the bank’s customer experience.
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