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How to manage your home loan repayment post rate hike

Two of the top two players in the home loan segment, HDFC Ltd and ICICI Bank, have hiked lending rates by 25 basis points. HDFC has raised its prime lending rate, on which its adjustable rate home loans are benchmarked, by 25 basis points to 16.65% with effect from Friday. Following the rate revision, it would offer housing loans up to Rs 30 lakh at 10.40% and loans above Rs 30 lakh at 10.65%.

ICICI Bank has also raised its base rate by 25 basis points, from 9.75 to 10%. Following the hike in base rate, the interest rate on loans up to Rs 30 lakh is 10.4% and on loans above Rs 30 lakh it is 10.65-11.25%. The rates on fixed loans will remain unchanged, said a press release from the bank.

Assuming a Rs 50 lakh loan of 180 months (15 year), at 10.4%. The monthly Equated Monthly Installment (EMI) is Rs 54,960 and the overall interest payable (assuming full tenure) works out to Rs 48,92,868.

After the hike, the interest rate will be 10.65%. Now the overall interest payable works out to Rs 50,32,446 and the monthly EMI is Rs 55,735.82, assuming the tenure remains the same.

The difference in total interest outgo is Rs 1,39,579.

According to Vipul Patel of Home Loan Advisors, usually lenders will maintain the same EMI and increase the tenure, since it is operationally easier. But if the EMI is maintained then the tenure will go to 186 months and the overall interest payable increases to Rs 53,45,632. In this case the difference in the total interest outgo works out to Rs 4,52,764.

"That is why borrowers must insist for increase in EMI as rates increase in order to mitigate the impact of the rate hike. In the long-term this will benefit borrowers as rates start declining," advises Patel.

If you are considering either shifting your loan to another bank or pre-paying the loan, it should be done only if the savings in interest outgo is significant enough, says Adhil Shetty, of Bankbazaar.com.

In case of loan transfer some make sure that the decrease in interest rate should make a significant difference even after factoring in the processing fee,etc. Also, consider a scenario where post your loan transfer, if the new bank you have procured your loan decides to hike the interest rate in a matter of months, then will the shift be worth it. A loan transfer also means that legal paperwork will be repeated from scratch and the whole process may require time and effort, Shetty points out.

"If you can prepay small amounts regularly and manage your EMI comfortably, you should opt for this,'' he says. But before making the pre-payment first check how much you can comfortably prepay on a regular basis or via a lump sum. If you are able to manage the difference in interest outgo post-hike to a larger extent compared to a loan shift, you can stick to prepayment.

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