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Things to Do When Servicing a Home Loan

Highlights

  • Servicing a home loan? Avoid doing unnecessary expenses, look for an attractive balance transfer deal, etc.
  • This will ensure timely loan servicing as well as save on your interest payments

A home loan is a long term commitment as the repayment spans for around 20-30 years. As the loan will stay for such a long time, you will need to be vigilant all the time. You need to control your expenses plus keep an eye on the opportunity to ease the repayment burden. All this will help you in smooth repayment, which will further help maintain a good credit history. Here’s what you need to do if you are paying a home loan.

Spend Based on What You’re Left with Post EMI Payment

A significant chunk of your income will most likely go towards paying a home loan EMI. So, the spending which you may have been doing before taking a loan will have to be reduced significantly when servicing the loan. So, you need to spend based on what you are left with after paying a home loan EMI. This will help ensure payment of EMIs on time and help maintain a good credit score, which is necessary to get loans in the future.

Keep a Tab on Your Credit Card Purchases

Keeping an eye on your credit card purchases becomes extremely important when you are servicing a home loan. Spend on the necessities and to the extent that you can pay along with the home loan EMI. Glance at the credit card statement and see where you’ve spent from the cashless instrument. You may find some expenses unnecessary, so you need to stop incurring the same. This will ensure you have the required amount to pay your home loan EMIs.

Change Your Fixed Interest Rate into a Floating Rate

Home loans are provided either on a fixed and floating basis. A fixed rate loan will have the same rate of interest throughout the loan tenure. This can make many go for it only to curse later on. The rate of interest on a fixed rate loan is 2%-4% above the prevailing rates on a floating home loan. A floating loan will have a different rate of interest based on changes in the market rates. The fluctuation in the rate can cause a bit of a worry for those who don’t know the product much. Not for those who understand the dynamics and are thus able to deal with the same. The effect of fluctuation evens out in the long run and lowers interest obligations for borrowers compared to someone choosing a fixed rate loan. One more thing, the EMI remains constant with a floating rate loan. It’s the portion of principal and interest repayment that changes with the change in rates.

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Let’s consider an example to understand the likely repayment scenario with a fixed rate and floating rate home loan.

Example – Ramesh Gupta and Shyam Prasad apply for a 20-year home loan of INR 65 lakh each. While Ramesh applies for a floating loan at an interest rate of 8% per annum, Shyam accepts a fixed loan at a higher rate of 10%. The EMI for Ramesh and Shyam will be INR 54,369 and INR 62,726. On the other hand, Ramesh will pay interest worth INR 65,48,465. Whereas, Shyam’s interest liability will be INR 85,54,338, which is INR 20,05,873 more than that of Ramesh. So, with a greater EMI of INR 8,357, Shyam will pay INR 20 lakh more than Ramesh. Although the payment obligations of Ramesh won’t remain the way throughout due to the changes that are expected in his floating loan, he will most likely pay much lesser compared to Shyam.

However, if you have chosen the fixed rate, you must have been paying a home loan via higher EMI because of the higher rate of interest. But it’s never late; get the fixed rate loan converted into a floating rate by asking your lender to do so. The lender will charge you on the same. The table below shows the charges for changing your fixed loan to floating.

LendersConversion Charges
State Bank of India (SBI)INR 5,000
HDFC LimitedAs Applicable
ICICI Bank1.75% of the principal outstanding
LIC Housing Finance (LIC HFL)INR 10,000
Punjab National Bank (PNB)As Applicable
PNB Housing Finance (PNBHFL)0.50% of the principal outstanding
Axis Bank2% on the drawing power
Kotak Mahindra BankAs Applicable
YES BANK0.50% of the principal outstanding

Switching is also Needed Within Floating Rate Benchmarks

Floating rate home loans are based on benchmarks like base rate, the marginal cost of lending rate (MCLR) and repo-linked lending rate (RLLR). Of these benchmarks, RLLR is the most efficient one and was introduced just a few months back on October 1, 2019. As the RLLR-based home loan rates move in tandem with the changes made in the RBI repo rate, it helps ensure greater transparency compared to old benchmarks like base rate and MCLR. A lot of borrowers must have been servicing their home loan under these old benchmarks. If you are one of those, get it converted to RLLR as soon as possible and save in the process.

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Now as the RBI is cutting repo rate, RLLR-based home loan rates are decreasing in the same proportion, which hasn’t been the case with MCLR and base rate. MCLR-based loans have been better than base rate loans but lag behind RLLR-based loans. So, a conversion to RLLR will bring tremendous savings to borrowers. The conversion will come with some charges, which can vary from lender to another. The table below shows the conversion charges levied by some lenders. Even if the table does not mention the lender where you are servicing your home loan at, looking at the same will give you an idea of what you’ve to pay for it.

LendersConversion Charges
State Bank of India (SBI)INR 5,000
ICICI BankIf prepayment charges are not applicable, INR 1,000 will be debited
If prepayment charges are applicable, the bank will levy a charge at 0.50% of the principal outstanding
Punjab National Bank (PNB)As Applicable
Bank of BarodaINR 2,000
Axis Bank0.50% on the drawing power, subject to a minimum of INR 10,000
Kotak Mahindra BankAs Applicable
YES BANKNIL

Look for a Balance Transfer

Chances are that the RLLR-based home loan rate of your existing lender could be more than others. If that is the case, you should look for a balance transfer deal to save on your payments. Search for the lender that offers you a deal having an interest rate lower than the existing one by at least 0.25%-0.50%. And, if the loan has quite a bit of time left before it will be paid off in full, the balance transfer could lead to significant savings. An example below will help you understand the importance of balance transfer.

Example – You are servicing a 20-year home loan of INR 65 lakh at 8.35% per annum for the last 2 years. Now, if a new lender offers you a balance transfer deal at 7.85% per annum, how will you benefit from the same? Well, the table below will show you the savings likely on this deal.

Repayment AspectsDetails
Loan amountINR 65,00,000
EMI payable @ 8.35%INR 55,793
Interest payable @ 8.35%INR 68,90,306
Interest paid till nowINR 10,64,138
Outstanding balance after 2 yearsINR 62,25,107
EMI payable @ 7.85% over the remaining 18 yearsINR 53,904
Interest payable @ 7.85% over the remaining 18 yearsINR 54,18,148
Interest paid till now + interest payable over the remaining 18 yearsINR 64,82,286
Savings in terms of EMIINR 1,889 (55,793-53,904)
Savings in terms of interest outgoINR 4,08,020 (68,90,306-64,82,286)
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The new lender may charge a balance transfer fee also. So, the savings will reduce from INR 4,08,020 but will still be substantial.

Think of Doing Part Payment at Regular Intervals

Lenders allow prepayment either in full or parts without charging for the same, provided it’s a floating rate home loan. Paying a home loan fully at any given point of time can be a challenging task. But paying a portion of it is very much possible if you constantly save from your daily routine. You can pay at regular intervals to reduce the interest payment. The part payment amount reduces the outstanding balance and so does the interest payment. With regular part payment, the interest can be reduced substantially. An example below will help you understand better.

Example – You have been paying a home loan of INR 65 lakh at 8.20% per annum for 20 years. The EMI and interest payable amount to INR 55,180 and INR 67,43,307. If you make a part payment of INR 3 lakh each at the end of every 5 years of the loan, there will be three such incidences. Check out the table below to figure out the positive effects of regular part payments.

Repayment AspectsDetails
Outstanding loan balance at the end of 5 yearsINR 55,21,718
Interest likely to be paid till 5 yearsINR 24,81,411
Part payment amountINR 3,00,000
New outstanding Balance after 5 years of the loan (After part payment)INR 52,21,178
EMI likely to be paid for the next 5 yearsINR 50,501
Interest likely to be paid for the next 5 yearsINR 19,35,219
Likely outstanding balance after 10 years of the loanINR 41,26,337
Part payment amountINR 3,00,000
New outstanding balance after 10 years of the loan (After part payment)INR 38,26,337
EMI likely to be paid for the next 5 yearsINR 46,829
Interest likely to be paid for the next 5 yearsINR 12,83,111
Likely outstanding balance after 15 years of the loanINR 22,98,685
Part payment amountINR 3,00,000
New outstanding balance after 15 years of the loan (After part payment)INR 19,98,685
EMI likely to be paid for the next 5 yearsINR 40,718
Interest likely to be paid for the next 5 yearsINR 4,44,377
Total interest likely to be paid for the whole 20 years in this loan arrangementINR 61,44,118

As you can see the total interest obligation reduces to INR 61,44,118 by making part payment of INR 3 lakh thrice. This loan arrangement reduces your interest payment by as much as INR 5,99,189 (67,43,307-61,44,118). With successive part payment, the EMI reduces from INR 55,180 to INR 40,718.

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  • Home Loan Interest Rates September 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda7.00% - 8.40%
    Citibank8.20%
    HDFC6.95% - 8.00%
    ICICI Bank6.95% - 8.05%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.20% - 9.30%
    LIC Housing6.90% - 7.90%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital9.20% - 9.35%