Factors Affecting Home Loan EMI Calculation
You estimate your EMI by taking into account a fixed home loan amount for a fixed period at a fixed rate of interest. The term 'equated' does not mean that your EMI will never change. Your EMI can change over the course of time, and many factors influence your home loan EMI.
MakaaniQ tells you more about factors that influence your home loan EMI.
When the interest rate changes during the home loan tenure
Changes in the interest rate can affect your home loan EMIs positively, negatively or not at all. If it is a floating rate of interest home loan, your home loan EMIs may change according to changes in the market lending rates. Whenever the Reserve Bank of India (RBI) changes the bank rate, home loan EMIs tend to change too. Now, if you think that floating rates can be risky and that you must go for a fixed rate home loan, think again. Not all lenders offer fixed home loan interest rates. Fixed home loan interest rates do not remain fixed for the whole tenure. You can always request your lender to make changes in the home loan period to meet changes in your EMI payments.
When you change your home loan tenure
Whenever changes are made to the home loan tenure, your EMIs tend to change. The longer the home loan tenure, lower the EMI, and shorter the home loan period, higher the EMI. But, you should understand that a longer home loan tenure would mean more interest payment towards your home loan which increases your cost of credit.
When you pre-pay your home loan principal amount
All home loan providers allow you to make extra payment or pre-payment towards your home loan. This lowers your outstanding principal amount and the interest burden. Lenders usually charge some percentage (this mostly ranges from 1-3 per cent) on the outstanding principal amount as pre-payment penalty. Always check the pre-payment charge before signing the home loan agreement. If the interest that you pay on your home loan is higher than the return on your investments, then it is better to use funds towards the pre-paying your home loan.
When you choose step-up or step-down method of repayment
Borrowers can choose the home loan repayment options based on the volume of inflow of their incomes. This means that step-up home loan repayment is convenient for borrowers who are in the beginning of their careers, as their income is presumed to rise as they climb the corporate ladder. Similarly, step-down repayment is convenient for borrowers who are close to retirement. The EMIs change with these flexible repayment options.
When you shift your home loan to a new lender
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.