For a good four a half-year, the Reserve Bank of India (RBI) remained mum on raising the repo rate, the rate at which the central bank lends to commercial banks, before it hiked the same on June 6, 2018. Before the hike, there were monetary easing from RBI which led to the reduction of interest rates from lenders. Banks’ MCLR, a 2-year old interest rate benchmark, fell by more than 100 basis points, especially after demonetization.
The low inflation also led RBI to ease the policy rates, further transpiring into a reduction of home loan and other rates. But now, tides are turning with MCLR notching up all the time. Especially since the beginning of 2018, banks are raising MCLR, which affect home loans much more than any other lending products.
The rates have gone up by as much by 30-50 basis points in a span of 6 months. Now as home loan interest rates are climbing up, there must be tension building in you as to how to manage the interest hike burden, right? Yes, the situation sounds a bit critical. But still, you need not worry as following the tips advised in this article would take you out of the rot.
Should You Refinance Your Home Loan?
Refinance is meant by transferring the loan balance from one lender to another. Many lenders offer a lower rate of interest on balance transfer. Changing from base rate to MCLR would also qualify as a refinance. Doesn’t matter whether you switch from one lender to another or from base rate to MCLR, the difference between your existing and proposed rates must be 25 basis points and above to gain reasonable savings over the interest payment. Also, the refinance can involve a charge that can be anywhere between ₹5,000-20,000. So, don’t forget to subtract the same from the differential interest savings to get the realistic amount you are likely to save with a refinance. Let’s understand the crux with an example below.
Example – Your existing lender is charging an interest rate of 8.90% on your loan of ₹75 lakhs. It’s a 20-year loan that you are servicing, of which 2 years are gone. You are paying an EMI of ₹66,998, with the total interest paid so far equaling to ₹13,10,403, according to home loan EMI calculator. The calculator further shows that you are supposed to pay a total of ₹85,79,484 as interest. Looking at the interest rate hike burden, you want to switch to another lender which can take your outstanding balance of ₹72,02,454 for the remaining 18 years at a lower rate of interest. You found a lender willing to offer the facility at 8.60% p.a. If you do transfer the remaining balance, the EMI would come down to ₹65,659, with the interest repayment likely to be ₹69,79,829 over the course of 18 years. Now, if you add the interest you have paid so far to the interest likely on balance transfer, the resultant sum would be ₹82,90,232, giving you a savings of ₹2,89,252 (85,79,484-82,90,232). If we minus the charges (5,000-20,000) of balance transfer, savings reduces to ₹2,84,252-2,87,252.
Part Payment Could Also be a Good Option
You can also make a part payment of the loan to reduce the outstanding loan balance, which would further lead to a decrease in the interest outgo. Sticking to the previous example wherein the outstanding balance read as ₹72,02,454 at the end of 2 years. If you pay ₹10 lakh of those, the outstanding balance would reduce to ₹62,02,454. Doing so would bring down the EMI to ₹57,696, with the total interest repayment estimated to be ₹62,59,830. Adding the latter to the interest paid so far would give a sum of ₹75,70,203, resulting in a savings of ₹10,09,251 (85,79,484-75,70,203).
To make all these calculations, you must refer to home loan EMI calculator that awaits online. All you need to do is to enter three variables of loan amount, interest rate and tenure.