Finally, home loan rates have eased a bit —albeit by 0.25% on the back of a similar reduction in the policy rates by the Reserve Bank of India. However, home loan borrowers are rejoicing at the small reduction in rates, as it has come at a time when they are battling the twin-menace of the higher cost of living and higher EMIs.
Even a measly reduction is likely to ease the burden for many customers, especially for those who use a major part of their salary to take care of their EMIs. However, there is a catch. When a bank lowers its home loan rate, it typically lowers the tenure of the loan by keeping the EMI constant. Of course, one has the option to ask the bank to reduce the EMI and keep the tenure constant.
However, many borrowers get a bit confused about it because of the math and tax angles. If the bank or the home loan company contacts you about the change in tenure or EMI of the loan, you should ask for the fresh amortisation schedule to see the exact impact of the rate change on your housing loan.
"From a borrower's perspective, it is easier to understand the impact in rupee terms than in percentage terms. Also, the borrower should cross check the new amortisation schedule with the old one to ascertain the impact," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.
Lower The Tenure
"By default, a bank offers the option of lowering the tenure of the loan. This is because any change in the EMI requires additional paperwork. In fact, even in the clients' interest lowering the tenure is a better option," says Vipul Patel of Home Loan Advisors. The choice of lowering the EMI and keeping more money in hand may sound tempting. But it is best to reduce the tenure of the loan, provided you can afford it.
"It is better to reduce tenure if you are comfortable paying the same or a marginally higher EMI. It will result in huge interest savings," says Pankaj Mathpal, certified financial planner and managing director, Optima Money Managers. For example, let us assume you have taken a 20-year loan of Rs 50 lakh at an interest rate of 11%. You would be paying an EMI of around Rs 51,609 for it. If the home loan rate is reduced by 0.25% to 10.75%, the EMI would come down by Rs 848 to Rs 50,671.
Now if you can afford to pay the same or a little over the old EMI, you can reduce the tenure of your loan. For example, if you can pay an EMI of Rs 52,429, you can lower the tenure of your loan by two years and save Rs 8.58 lakh as interest cost. "If an individual brings down the loan tenure from 20 years to 15 years, in effect he or she is bringing down the risk factor of the loan," says Suresh Sadagopan, certified financial planner and founder, Ladder 7 Financial Advisories.