As ET Wealth completes 10 years, we present the compressed wisdom of this eventful journey. Here is a story on what home loan borrowers can do to prepare for future interest rate hikes especially if the home loan is linked to an external benchmark such as repo rate etc.
How borrowers can beat the interest rate hike
Here are the three options home loan borrowers can consider.
I. Make prepayment and save
Use surplus cash to pay off some part of the loan. This will have a big impact on the tenure and interest payable.
| Home loan | Rs 50 lakh |
| Rate of interest | 8.5% |
| Tenure | 25 years |
| EMI | Rs 40,261 |
| Interest payable | Rs 70.78 lakh |
| Amount prepaid in 7th month | Rs 2.5 lakh |
| Revised interest payable | Rs 56.15 lakh |
| Tenure reduced by | 2 years 1 month |
| Interest saved | Rs 14.63 lakh |
II. Increase EMI to save big
When rates are hiked, the loan tenure gets extended, increasing the interest outgo. Hiking EMI saves interest.
| Home loan | Rs 50 lakh |
| Rate of interest | 8.5% |
| Original tenure | 20 years |
| EMI | Rs 43,391 |
| Interest payable | Rs 54.14 lakh |
If the home loan rate is hiked…
| New rate of interest | 8.75% |
| New tenure | 21 years |
| Interest payable | Rs 59.53 lakh |
| Additional interest | Rs 5.39 lakh |
To counter this, increase the EMI…
| Original EMI | Rs 43,391 |
| New EMI | Rs 44,186 |
| Extra payment per month | Rs 795 |
| Interest payable | Rs 56.04 lakh |
| Savings in interest* | Rs 3.49 lakh |
*Compared to extension of tenure
III. Switch lender for lower rate
Lenders offer lower rates if a borrower refinances a loan. Choose this option if rate offered is lower by at least 25 bps.
| Home loan | Rs 50 lakh |
| Tenure | 20 years |
| Existing lender rate of interest | 8.75% |
| EMI | Rs 44,186 |
| Interest payable | Rs 56.04 lakh |
| New lender rate of interest | 8.5% |
| EMI | Rs 43,391 |
| Interest payable | Rs 54.14 lakh |
| Ancillary charges and processing fee | Rs 15,000 |
| Interest saved | Rs 1.75 lakh |
Sources: Mortgage World, SBI website
(Originally published on June 18, 2018)
