It seems the honeymoon period for home loan borrowers, who for a good 4 years enjoyed the benefits of constantly declining interest rates, is over with banks raising the lending cost ever since the beginning of 2018. The Marginal Cost of Lending Rate (MCLR), a loan pricing benchmark, has risen by around 50 basis points in 2018.
The hike in the MCLR is in line with the increasing cost of funds for banks owing to 25 basis point hike each in the repo rate made by the banking regulator Reserve Bank of India (RBI) in the last two monetary policy announcements. The monetary tightening stance is largely on the back of inflationary pressure emanating from the surge in oil prices besides other macroeconomic factors.
Whatever the reason may be, it’s the borrowers who have been at the receiving end of rising home loan interest rates in India. The effect of the rate hike, though, can be reduced to a great degree by using some methods. Let’s not waste any time further and come straight to those methods.
Move No 1 – Decrease the Repayment Tenure
The rate hike may not lead to a surge in the EMI amount but the interest component would be on the higher side compared to the principal. You can just rejig your repayment by decreasing the tenure of the loan to reduce the interest burden. Let’s take an example to understand things better.
Example – You are paying the EMI of ₹44,026 for a 20-year loan of ₹50 lakhs since the beginning of 2018. The interest rate offered to you is 8.70% per annum, which could lead to an interest outgo of 55,66,354 over the course of 20 years. You have completed 8 months of a 20-year loan and so far paid an interest of ₹2,88,400. The outstanding loan balance stands at ₹49,36,192, which would be repaid over the next 19 years and 4 months. If you take off 2 years out of those remaining, the resultant tenure would come as 17 years and 4 months.
Servicing the outstanding amount for a curtailed tenure would lead to an EMI and interest of ₹46,032 and ₹46,38,628, respectively. Adding the likely interest of ₹46,38,628 to the one you have paid so far i.e. ₹2,88,400 would give a sum of ₹49,27,028. This leads to a reduced interest liability of ₹6,39,326. The EMI does rise by ₹2,006 but the savings of interest is too much for you to reduce the tenure.
Move No 2 – Balance Transfer to Another Lender
Transferring your outstanding balance to lowest home loan rates could result in a windfall of savings for you if the difference in the rates is 30 basis points or more. Suppose you find a lender who can take over the outstanding balance of the loan from your existing lender at an interest rate of 8.65%, which is 30 basis points lower than the current one of 8.95% per annum.
Keeping the original loan amount and tenure as shown in the example above with an exception of interest rate, you will find the EMI to be ₹44,826. The interest paid so far in 8 months would be ₹2,96,735. At this pace, the interest outgo is estimated to be ₹57,57,980. The outstanding loan balance stands at ₹49,38,127, which on getting transferred at 8.65%, would reduce the EMI to ₹43,888 and keep the interest liability for the remaining course of 19 years and 4 months to ₹52,43,737.
You can save an overall interest of ₹5,14,243 with the balance transfer, which comes with a charge of ₹5,000-20,000. Taking into account the charges, the savings would reduce to ₹4,94,243-5,09,243 but still a substantial amount for you.