Few days back, I wrote home loan interest rates are down to historic lows of sub-7%. The reason is first that the interest-rate scenario is pretty low in general and also because the key lenders are looking to give some push to the housing sales momentum and benefit from it themselves.
From a borrowers perspective, they couldn’t have asked for anything more at this time. At least mathematically. Property prices down + falling home loan rates.
These are good days for buyers no doubt.
But before we discuss this any further, there is one thing to understand here. Low loan rates is good news for borrowers. But that is not sufficient condition to go and buy a house. Home loan rates is just one of the important factors among several others when deciding to purchase a house. I have discussed this at length in this post – Home loan at 6.7%. Should you buy a house now?
By the way, home loan interest rates are not the same for everyone. So if you read that bank has reduced the home loan rate to 6.7%, then all new borrowers won’t’ get the same rate. Such ‘lowest home loan rates’ are generally available only for borrowers with good credit scores, who can bring in a reasonable amount of downpayment and who have a reliable source of income and can establish their ability and intent to repay the loan on or before time.
But coming back to the topic.
What is all the fuss about falling loan rates and how does it benefit the borrowers exactly?
Not much to explain here but still let me do it in simple words.
A reduction in home loan interest rate brings down the overall interest cost of the borrowing.
Let’s take a small example.
Suppose you take a home loan of Rs 50 lakh for 25 years. Now assuming that earlier that home loan was available at 7.5% per annum. The EMI then would have been Rs 36,950 per month and the total interest outgo would have been Rs 60.8 lakh. Now if the same loan is available at lower rates, let’s say if the interest rate is reduced to 6.7%, then the EMI will come down to be Rs 34,388 per month. The interest component of the loan too will come down to Rs 53.1 lakh. That’s almost a saving of Rs 8 lakh.
Another way to get the benefit might be opt for reducing the loan tenure and keeping EMI the same as earlier (i.e. Rs 36,950). In that case, you will keep paying the same EMI but the loan will close much earlier. Something like in 21-22 years instead of the original 25 years. So by keeping the EMI the same and reducing tenure, you can get yourself much higher savings (interest wise and time-wise both) compared to reducing EMIs in case of a rate cut.
I hope that explains how the home loan rate cut benefits the borrowers. Of course, home loan rates are floating and might go up again in later years. But that’s fine. The idea is to understand how lower rates benefit the borrower – by either reducing EMI amount and total interest or/and by reducing the loan tenure.
In general, the new reduced rates are applicable to the new borrowers and not immediately to existing borrowers. The logic is simple. Banks are trying to attract new borrowers first. The existing ones don’t need to be attracted again as they are already there. While this in no way means that the existing borrowers cannot avail the benefit of lower new rates, they will have to go through a slightly different route to get their home loan rates lowered.
For existing borrowers who have home loans at higher rates than the new rates on offer, they can consider going for a loan balance transfer. But don’t just do this without doing a bit of homework. IN general, doing a balance transfer is mostly advisable in case the differential in the rate offered is at least 50 basis points or 0.50% and the residual loan tenure is at least 10 years or better, more. If the number of years left is more than 20, then even a smaller 0.30% difference might be sufficient to consider a balance transfer. But just difference in rates is not the only factor. Also consider charges like stamp duty, processing fee, etc.
A smart balance transfer of your existing home loan can lead to hefty savings and reduce your interest and EMI burden substantially.
One more point. Before you go to new lenders to apply for a balance transfer, first try and negotiate with your existing bank or lender. If this works out, then you will save yourself from the trouble of lengthy process, documentation, charges, etc.
Many are of the view that if you were sitting on the sidelines till now but always intended to buy a house for self-use, then maybe this might be a good time to do so. Also, lower interest rates not only makes the loan less expensive, it also gives borrowers the option to borrow more (if required). Why? Because since the interest is lower, the monthly EMI outflow is lower too. This in turn boosts the borrower’s eligibility and makes it possible for customers to borrow a bigger quantum of loan. So one can potentially look at buying a costlier property assuming it still makes practical sense to do it. Just borrowing more because you can doesn’t sound right. So weigh your options and then make your decision.
Nevertheless, the reduction in home loan rates by most banks is expected to push up the demand for property purchases immensely. Attractive interest rates combined with the return of some sanity in property prices are making real estate an interesting space for those who consider having it in their portfolio.
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