With the Russia-Ukraine war showing no signs of abating soon, economies worldwide have taken a beating with oil prices firming fast. WTI crude oil rose 5.1% to $96.23 per barrel, whereas Brent has breached $100 per barrel. It will further aid in inflation all over including India. The Consumer Price Index (CPI)-based inflation, which rose to a 7-month high of 6.01% in January 2022, would inch up further as western countries led by the US have imposed sanctions on Russia, one of the premier global oil exporters. So, the repo rate which was put on hold by the Reserve Bank of India (RBI) for around two years may go up amid upside risks to inflation. This, in turn, would make banks raise the interest rate of floating rate loans such as a home loan. The increased rates will translate into more outflow from customers. But they can stem the flow by implementing a perfect loan strategy in the coming days. Let’s read about the same.
So, What Should be Your Home Loan Strategy Now?
As rate hikes have become imminent with increasing inflation, maybe this is the right time to do a home loan prepayment. This loan strategy can cut short the tenure and reduce massive interest payments. You can either pay off the entire outstanding balance or do a partial payment. The best part is the ZERO charges on prepaying your floating rate home loan. In the case of a fixed rate loan, lenders charge around 2-4% of the outstanding balance plus applicable taxes. So, if you’ve accumulated savings, using the same for prepayment won’t be bad!
The Loan Strategy to Employ After a Partial Prepayment
Even a significant partial prepayment amount can help reduce your interest obligations drastically. Afterward, you get two options – either to reduce your tenure by continuing to pay the same EMI or pay a reduced EMI by not changing the tenure. Our calculation says by paying the same EMI after partial prepayment will help you save more. Let’s find out how.
Example – You have been paying a home loan of INR 50 lakh for the last three years at 7.80% per annum. The loan is for 20 years. Now, you’ve got INR 5 lakh for prepayment. So, how much could you save by continuing to pay the same EMI compared to a reduced monthly obligation afterward? Check the calculations below.
|Partial Prepayment Aspects||Savings When Paying the Same EMI (In INR)||Savings When Paying the Reduced EMI (In INR)|
|EMI Before Partial Prepayment||41202||41202|
|Interest Payable Over 20 Years||48,88,432||48,88,432|
|Outstanding Loan Balance While Prepaying||46,48,329||46,48,329|
|Outstanding Loan Balance After Partial Prepayment||41,48,329(46,48,329-5,00,000)||41,48,329(46,48,329-5,00,000)|
|EMI Payable After Partial Prepayment||41202||36770|
|Interest Payable After Partial Prepayment||26,08,912||33,52,732|
|Overall Savings||22,79,520 (48,88,432-26,08,912)||15,35,700 (48,88,432-33,52,732)|
By continuing to pay the same EMI of INR 41,202, the loan will carry on for another 13 years and 8 months as opposed to the entire 17 years with a reduced EMI of INR 36,770. You can save INR 7,43,820 (22,79,520-15,35,700) more by paying the same EMI after partial prepayment. That’s what we call a loan strategy!
Stop Shopping for Unnecessary Loans
Now that inflation is expected to rise steeply, don’t take unnecessary loans. Lenders are extending their product portfolios by offering loans on even consumer durables such as refrigerators, washing machines, etc. These are small-ticket purchases and can be done even with savings. So, no point in paying interest for the same. Even buying the latest iPhone through loans or credit cards is not advisable. The reason being the value of iPhones will only depreciate faster. So, the interest you pay on the same can far exceed the value you might get by selling the iPhone later.