- A home loan has various facets to it - You may not know all of them
- Read this post to know some less-known things regarding a home loan balance transfer, top-up, prepayment, etc.
Most borrowers know that a home loan is not financed fully and they need to make some payment (10%-25% of the property cost) from their end. Plus, they know the importance of a lower interest rate to their financial harmony. But given that a home loan has different facets to it, many are still unaware of some important things. There are many facets to balance transfer and prepayment that need attention. If you are unaware of those and continue to be so, it is you who will lose by paying more to the lender. In this post, we will throw light on some less-known things related to a home loan. So, keep reading!
Five Less-Known Things About a Home Loan
Of the things that most borrowers may not know about a home loan, we have listed out five that you can see below. These are top-up on a balance transfer, repayment scenario to have when doing a balance transfer and prepayment, etc.
Top-up Also Available on a Home Loan Balance Transfer
While servicing a home loan, you could apply for a top-up loan over the running loan amount to fulfill purposes such as travel, wedding, etc. But most think that a top-up loan can be applied only at the same lender, which is not true. You can also get it while doing a home loan balance transfer to another lender at a lower rate of interest. The existing loan balance will get transferred to another lender, and over the transferred balance, you will get a top-up. The top-up interest rate could either be at the par with the balance transfer rate or a shade above. You can check that with the lender when you do a top-up on the balance transfer amount.
Balance Transfer is Not Only About Getting a Lower Rate of Interest
Yes, a home loan balance transfer eases the repayment burden greatly if the offered interest rate is substantially lower than the running home loan interest rate. But a lot of borrowers are still unaware of the implications of home loan tenure when doing a balance transfer. People just look at the interest rate and do the deal, undermining the tenure part only to pay more to the new lender. During a balance transfer, you can choose to service the loan for the remaining period. Doing this will help reduce both the Equated Monthly Installment (EMI) and interest outgo. At the same time, you also have the option to go with the same EMI on a balance transfer, which many are not aware of. But what is the benefit of going with the same EMI? Well, the tenure will reduce automatically to reduce the interest payment even more. Let’s consider an example to understand it better.
Example – Mahesh is paying a 20-year home loan of INR 60 lakh at 8.35% per annum. He has paid EMIs for the last two years without any fail. So, he gets a balance transfer facility at 7.50% per annum. Now, what will be the repayment scenario for him if he chooses to pay the reduced home loan EMI for the remaining 18 years? Whereas, if he goes for the same EMI, how will the repayment fare for him? Let’s find out in the table below.
|Home Loan Aspects||When Going with the Reduced EMI on a Balance Transfer (In INR)||When Going with the Same EMI on a Balance Transfer (In INR)|
|Original Loan Amount||60,00,000||60,00,000|
|EMI Paid Over 2 Years at 8.35%||51,501||51,501|
|Interest Paid Over 2 Years at 8.35%||9,82,281||9,82,281|
|Interest Payable Over 20 years at 8.35%||63,60,283||63,60,283|
|Outstanding Loan Balance After 2 Years||57,46,253||57,46,253|
|EMI Payable on the Transferred Balance at 7.50%||48,554||51,501|
|Interest Payable on the Transferred Balance at 7.50%||47,41,477||41,37,239|
|Interest Paid at 8.35% + Interest Payable at 7.50%||57,23,758||51,19,520|
|Savings||6,36,525 (63,60,283-57,23,758)||12,40,763 (63,60,283-51,19,520)|
Note – Figures shown are indicative
You can see how Mahesh can save more if he chooses to pay the same EMI on a balance transfer. By choosing this option, the transferred loan balance will be paid over a reduced period of 192 months i.e. 16 years. So, his loan will run for 18 years overall.
The Same EMI Option is Also Available When You Make a Part Payment
The word ‘prepayment’ is often heard whenever you discuss loans. It is a process by which you can either pay the whole outstanding loan balance or a part of it. The best part is that you can do so without having to pay any fees for it provided the loan is on a floating basis and not fixed. Both full and part payments help reduce interest obligations for borrowers. Since many can’t pay the entire outstanding before the loan tenure, they go for part payment. But while doing part payment, many borrowers don’t know they can do a change to the loan tenure afterward. They normally go for a reduced EMI to reduce the monthly payment and don’t care about the extra savings they could make over time. Yes, you can continue to pay the same EMI after part payment. This way, the tenure will reduce and offer you increased savings. Let’s understand it via an example below.
Example – You apply for a home loan of INR 50 lakh for 20 years at an interest rate of 7.50% per annum. In case you get surplus money of INR 6 lakh and take 3 lakh out of it towards a home loan part payment by the end of the 8th year of the loan. How will the repayment pan out after part payment if you choose any of the two options – paying the reduced EMI and paying the same EMI? The table below will guide us better.
|Loan Aspects||Paying the Reduced EMI After Part Payment (In INR)||Paying the Same EMI After Part Payment (In INR)|
|Original Loan Amount||50,00,000||50,00,000|
|EMI Paid Over 8 Years at 7.50%||40,280||40,280|
|Interest Paid Over 8 Years at 7.50%||26,84,006||26,84,006|
|Interest Payable Over 20 Years at 7.50%||46,67,118||46,67,118|
|Outstanding Loan Balance||38,17,158||38,17,158|
|Part Payment Amount||3,00,000||3,00,000|
|Outstanding Loan Balance After Part Payment||35,17,158||35,17,158|
|EMI After Part Payment||37,114||40,280|
|Interest Outgo After Part Payment||18,27,255||15,89,067|
|Interest Paid before Part Payment + Interest Likely to be Paid after Part Payment||45,11,261||42,73,073|
|Savings||1,55,857 (46,67,118-45,11,261)||3,94,045 (46,67,118-42,73,073)|
Note – Figures shown are indicative
From the table, you can say that going with the same EMI after part payment makes more sense as interest payments reduce more compared to when you choose the reduced EMI plan. When you choose to pay the same EMI after part payment, the loan tenure will reduce as pointed out above. In this case, the loan will run for another 127 months after part payment. Overall, the loan will run for 223 months i.e. 18 years and 7 months.
Teaser Home Loan
It is a home loan product where the interest rate remains fixed for a particular period before it converts into a floating basis. Most of you may not be aware of this concept. Till the time the fixed rate is in place, there won’t be any change in the rate of interest. Usually, such loans have a fixed rate of interest for around 2 to 5 years. With no interest rate fluctuation for such a period, some opt for it only to curse later on. Yes, a fixed rate loan, despite no change in the interest rate for some years, can still be more costly than a full-fledged floating rate loan where the interest rate will change with the change in market rates. Lenders keep the fixed rate higher than the floating rate by 2-4%. And, over 2 to 5 years, it can increase the cost of borrowers. So, don’t think about a teaser home loan. Choose an all-out floating rate loan to pay your home loan EMIs.
Interest Rate Remains More from the Third Home Loan Onward
When you buy the third house on a home loan, the interest rate for the same can be more than the regular home loan rate. The reason being the third home will come under the category of commercial real estate (CRE) by default even if you have bought a residential property. Sounds strange, but it’s true! The rates for a CRE home loan can be 0.50%-1% above the regular home loan interest rate. You can check the CRE home loan rate in the table below.
|Lenders||CRE Home Loan Rates (In Per Annum)||Normal Home Loan Rates (In Per Annum)|
|State Bank of India (SBI)||7.45%-8.10%||9.15% - 11.30%|
|HDFC Limited||8.75%-9.75%||8.50% - 9.40%|
|PNB Housing Finance (PNBHFL)||9.80%-10.75%||8.50% - 11.95%|
|LIC Housing Finance (LIC HFL)||9.50%-10.50%||8.50% - 10.75%|
|Bank of Baroda||7.25%-8.65%||8.50% - 10.60%|
|Canara Bank||7.40%-9.40%||8.85% - 11.25%|