A "low interest" loan shouldn't mean you have very little interest in paying it back!
There are numerous home loan schemes available in the market, currently. Home loans are designed to meet each home buyer’s need. However you need to understand the most significant constituent of a loan – EMI. EMI (Equated Monthly Installment) is a part of the loan paid to the lender on a regular basis (daily or monthly) for the purpose of buying a house or flat.
An EMI is a monthly amount paid by the borrower to the lender in order to clear the outstanding loan amount. A specific sum of pre-decided amount is deducted from your chosen account, every month without fail. The deduction is not affected by any sudden financial constraints you may face and will continue to be carried out by the bank. The EMIs are usually deducted on a fixed date every month until the tenure of the loan is completed and the whole loan amount is repaid.
EMI is computed based on an unequal distribution of the principal amount and interest. In the initial phase of a home loan, majority of the EMI constitutes the interest towards the loan. As the loan reaches its maturity, over time and the principal amount gets repaid, the outstanding balance decreases. Eventually, the interest amount is lower than the principal. However, EMI remains constant every month.
In some exceptional cases, the EMI also might change. For instance, the borrower decides to pay a large portion of the outstanding loan. The additional amount is then adjusted with the outstanding balance, thereby decreasing the EMI. However, the lender gives you an option to maintain the EMI and decrease the loan tenure instead. The EMI of your home loan also fluctuates if you have chosen floating rate of interest as the EMI will vary based on fluctuations in the market.
The EMI of your home loan is determined by the following factors:
EMIs for a home loan are calculated using the following mathematical formula:
EMI = P x r x (1+r) n/((1+r)n-1)
Where, P = Loan amount
r = Rate of interest
n = Loan Tenure (number of months)
Sometimes borrowers can choose to avail part disbursement of their home loan by timing it according to the stages of the house construction. In such cases, lenders require you to pay a monthly pre-EMI until the final loan disbursement. However, only after the disbursement of the entire loan amount, the loan repayment is started. The pre-EMI only constitutes the interest earned on the disbursed loan amount.
Step Up and Step Down EMI:
EMIs can sometimes be changed based on the borrower’s income. In step up EMI, there is a gradual rise in the EMI based on the increase of the borrower’s salary. In this case, the EMI charged in the initial part of the loan tenure is low and over time it increases with the expected increase in the borrower’s income. In step down EMI, the EMI gradually decreases with the repayments.
Advance Loan Disbursement:
In some cases, the entire loan amount is disbursed even before the construction of the house is complete. This is granted by the lender upon request from the borrower. The advance loan disbursement is only sanctioned when the bank or the lender trusts in the builder to complete construction on time.
Loan Amortization Schedule:
A loan amortization comprises of all information regarding the home loan availed. Information such as borrowed loan amount, scheduled payment periods, EMI break-up and outstanding balance is given in the schedule.
Union Finance Minister Arun Jaitley on Friday stated that the cut in the repo rate by Reserve Bank of India (RBI) was aimed at making home loan EMIs cheaper than house rents. The Union Minister, however, stated that the lowering of the EMIs will not be effective immediately. This was because the lenders would need time to pass on the benefit of rate deduction to the customers.
It needs to be mentioned here that on Thursday the country’s central bank had reduced the repo rate by 25 basis points. This was the second time in 2019 that the repo rate was reduced by Reserve Bank of India. The central bank in its first review meeting for the 2019-20 financial year decided to bring down the repo rate to 6 percent, which is the lowest in the last three fiscals. The central bank in its review meeting had also revised the GDP growth forecast for 2019-20 from the one predicted in the February policy. The GDP growth forecast was lowered to 7.2 percent from 7.4 percent.
11 April 2019
The Reserve Bank of India (RBI) on Thursday cut the repo rate for the second time in the year. The rates were cut by 25 basis points by the central bank in its bi-monthly monetary policy review. The cut in the repo rate is likely to bring down the EMIs for retail borrowers, if bank pass on the benefit of the cut to them. Post the cut in the rate, repo rate stands at 6 percent.
It needs to be mentioned here that in the previous policy review held on February 7, the country’s central bank had cut the repo rate by 25 basis points.
RBI in its policy announcement today said it has decided to defer the move of banks using external benchmarks while disbursing new floating rate for personal and retail loans from 1 April 2019 for the time being. It is noteworthy to mention here that the central bank in its statement on Development and Regulatory Policies dated 6 December 2018 had asked the banks to do so.
10 April 2019
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