Prospective home loan borrowers now have even more to cheer about as 2017 starts off with leading banks slashing their interest rates ( read here ). In the first phase of these rate cuts, public sector lenders including SBI, UBI and PNB have already announced lower interest rates starting at 8.5% on new home loans whereas leading private sector lenders such as ICICI Bank, LIC Housing Finance and Indiabulls are expected to follow suit. To quantify how big a difference it will make to prospective borrowers, consider this – when the home loan interest rate decreases by 1%, then a person who was previously approved for a Rs. 50 lakhs loan for a 20 year period, will be eligible for a loan amount of Rs. 55 lakhs over the same tenure. Let’s take a closer look at how these rate cuts are expected to affect key sections of home loan borrowers.
Benefit to Existing Borrowers
The revision in interest rates would benefit the existing home loan borrowers by reducing the loan tenure of repaying the loan amount significantly. If you have a home loan at a higher rate, the rate cut to 8.6%, will decrease your interest payout. In case you choose to keep on paying the original EMI amount, your home loan will be paid off before the original tenure is completed. On the other hand, if you keep your loan tenure the same, you individual payout will decrease leading to significant savings. The following is an example of your potential savings as a result of transferring your Rs. 1 crore home loan from 10% to 8.6% after 7 years. The tenure of the original loan has been fixed at 20 years.
Table1. Potential savings on transferring Rs 1 crore home loan after 7 years*:
|Original Home loan||Home loan Transfer|
|Loan Amount||Rs. 1 crore||
(outstanding amount at the end of 7 years)
|EMI Amount||Rs. 96,502||Rs. 89,692|
|Total interest due for the remaining tenure||Rs. 66,47,113||Rs. 55,84,774|
|Potential Savings||–||Rs. 10,62,339|
*The figures are indicative and the tenure has been kept unchanged to demonstrate possible savings.
When you opt for balance transfer option, make sure you check the outstanding amount, transfer cost, the new loan tenure and difference of the interest rates. Some lenders provide teaser offers where the low interest rates apply only a predetermined period and later the rates increase significantly. Also, the balance transfer option works best if you have completed a small part of the loan tenure so in case you only have 5 to 6 years remaining on your existing home, then the balance transfer will only provide a limited benefit.
Benefit to Prospective Borrowers
For prospective borrowers, this announcement could hardly have come at a better time. With India’s real estate witnessing a slow down, the low interest rate is definitely a godsend not just for buyers, but also for many cash-strapped realty companies. Add to this the fact that these home loan interest rates are the lowest in the past six years and new home borrowers should definitely consider opting for their dream home instead of waiting for rates to fall even further.