Increase your happiness by Prepay Home Loan Early

THE Reserve Bank of India (RBI) cut its repo rate by 50 basis points on September 29, taking the total reduction since January to 125 bps. But banks and housing finance companies offering home loans have cut their rates by up to 50 basis points only.

State Bank of India is offering interest rate on housing loan at 9.55% to salaried individuals. Similarly, HDFC is offering housing loan at 9.6-10.15% across all loan amounts and ICICI Bank at 9.6-9.65% for loan amounts less than Rs 75 lakh. So, if a new borrower takes a Rs 50-lakh loan for 20 years at 9.55% interest rate per annum, the equated monthly installment (EMI) will be Rs 46,770.

Lower risk weight

The central bank has also lowered the risk weights on select home loans of up to Rs 75 lakh where borrowers are willing to put in more money and lower the loan-to-value ratio. A Crisil research expects interest rate on home loans to come down by another 25-30 bps over the next few months because of this move. The RBI has lowered risk weights on housing loans of up to Rs 75 lakh from 50% to 35% in cases where the borrower puts in at least 20% of the value of the home as own equity for loans up to Rs 30 lakh and 25% of the value of the home as own equity for loans between Rs 30 lakh and Rs 75 lakh.

Increase EMI or tenure

For instance, an existing borrower of Rs 50 lakh who has paid for five years from the total tenure of 20 years, a 20-bps decrease in interest rate (1 bps a  hundredth of a percentage point) will reduce his EMI by Rs 550 from Rs 48,583 to Rs 48,033. This would mean a total savings of Rs 99,000 as interest payment for the remaining period of the loan. On the other hand, if the borrower keeps the EMI amount unchanged and reduces the period of the loan by four months, then the net savings on interest would be over Rs 2 lakh, provided the interest rate remains the same for the entire period of the loan. One can opt to make partial payments at regular intervals, say, every six months or one year, to repay the loan quickly and save the interest as banks and housing finance companies do not charge any pre-payment penalty for principal repayment.