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- Home loan interest rates are likely to fall post Covid-19 pandemic - Shall you prepay?
- Read this article to know what you should do to benefit yourself.
In the latest monetary policy meet held on March 24-27 2020, the RBI has decided to give a 3-month moratorium period for all outstanding loans as on March 1, 2020. Remember, this is not an EMI WAIVER. The move is in line with the economic pressures induced by the Coronavirus outbreak. So, this could mean some savings for you on your loan and help you deal with the likely situation of less or no income. Your credit score will not reduce if you don't pay the EMI. But doing so can raise your interest liability as banks would like to cover their losses, which is likely to be the case on deferred EMI payments, by increasing the interest component of the EMI after the moratorium period gets over. So, if you have the money, keep paying to reduce your interest liability. The moratorium, which was ending on May 31, 2020, has been extended till August 31, 2020.
The Covid-19 Coronavirus pandemic has an opportunity in store for home loan borrowers to cash in. Wondering how? Well, the pandemic could result in lower offtake of home loans because of the poor demand for buying homes. The poor demand will result from the lesser than expected annual increments for employees.
Companies are losing business volumes sharply because of Coronavirus led slowdown, and will most likely come with a flat appraisal this time around. This will most likely make lenders cut their home loan rates to make some grounds for the fall in their business.
So, if you are servicing home loans already, you have some serious savings in store for you. Read this post to know the benefits.
Nice Opportunity to Reduce the Interest Outgo on Your Running Home Loan with the Existing lender
As the home loan is available predominantly on a floating rate basis, the rate changes will change the component of interest and principal over time. Ever since banks have adopted the external benchmark of the RBI Repo Rate, the interest rate of floating rate loans such as home loans have mirrored the market rate changes in the exact proportion. Home loan rates have fallen to as low as 7.95% per annum. At the same, the maximum rate of banks is way below the double-digit mark. This could go further down given the situation that exists now, reducing the interest component of your loan.
Example – You are currently paying a 20-year home loan of INR 55 lakh at 9.00% per annum via an EMI of INR 49,485. The total interest liability over 20 years will amount to INR 63,76,383. Assuming you took the loan 2 years ago, you must have been paying EMIs at the rate benchmarked to the previous Marginal Cost of Lending Rate (MCLR). In these two years, you must have paid interest of INR 9,71,978. The outstanding balance as of now will be INR 52,84,339. If your lender is giving you a switchover to Repo Rate-linked Lending Rate at 8.50%, you could reduce your EMI outgo to INR 47,847 for the remaining 18 years. You’ll pay interest of around INR 50,50,708. If you add this to the interest you’ve paid so far, the total interest outgo (before switchover + after switchover) will be INR 60,22,686. You could save interest payments of INR 3,53,697 on this switchover. The switchover fee, which could be 0.25%-0.35% of the switchover balance of 52,84,339, amounts to INR13,211-18,496. Even if you deduct the switchover fee, you could still have a monumental savings worth INR 3,35,201-3,40,486
Mull a Balance Transfer to Another Lender if it Offers Switchover at a Lower Rate of Interest
Even as the benchmark rate corresponds equally to the changes made by the Reserve Bank of India (RBI) in the repo rate, the difference in spreads that banks charge over the benchmark makes it interesting for borrowers. See the spread and the benchmark of your bank. How much do they add up to become the eventual rate? Also, see the same in other lending institutions? If the interest rate of your lender is found to be too high, you could think of switching your loan to the lender that can take over your existing loan at a lower rate. Even if the new rate is lower by 0.50%-1%, it could lead to some serious savings, particularly when there’s a lot of time left for the repayment to be over.
Lenders to Consider for Balance Transfer amid Coronavirus Slowdown
|Lenders||Interest Rate||Special Offers on Balance Transfer|
|State Bank of India||7.35% - 8.00%||-|
|HDFC Ltd||7.55% - 8.45%||Processing fee waiver on balance transfer will be adjusted in the first EMI|
|ICICI Bank||7.45% - 8.55%||-|
|LIC Housing Finance Ltd||7.40% - 8.85%||No processing fee and waiver of 2 EMIs on balance transfer|
|Bank of Baroda||6.85% - 7.85%||-|
Note – Special offers are for a limited period. Please check with the lender where you make a balance transfer to.
Is it Worth Prepaying the Home Loan?
Yes, you can prepay. But the extent of prepayment will depend on your saving reserves, your future goals, etc. If your home loan is in early stages, you could think of prepaying it. The early stages of the loan see more interest payments than principal. But then, consuming all the savings towards loan prepayment could deal a serious blow to your future goals. So, if you have a huge bounty with you, look to pay off around 30% of the outstanding balance and reduce your interest payments over time. You can even close the loan faster by choosing a much shorter period after the prepayment. Maybe an example could help you understand our message better.
Example – Your 20-year home loan of INR 60 home loan must be making you pay an EMI of INR 53,984 at 9% interest rate. Now, as the loan has run for 5 years, the loan outstanding must have reduced to INR 53,22,422 . If you pay 30% of it, the outstanding will fall to INR 37,25,695 (approx.). The reduced loan amount will decrease the EMI to INR 37,791, which will lead to a total interest payment of INR 30,76,454 over the next 15 years.
If you want to close the loan faster, you could think of taking forward the new loan arrangement for a shorter tenure of 10 years. The EMI will increase but the interest will reduce greatly. So, if you are paying INR 53,984 as EMI, you can surely pay a reduced amount of INR 47, 196 and curtail the interest outgo to INR 19,37,769, a savings of INR 11,38,685. So, the choice is with you.