Manage your home loan and take control of your finance like a Pro!

Just two days back at office, I was discussing with one of my colleagues regarding increased rate of interest and its impact on country’s economy and individual’s finances and in that discussion, I come to know from my colleague that from his home loan’s EMI of ~₹30k, credit towards principal portion is only ~ ₹700...!!!!! 

Being a finance person, I got furious that how come this possible and going further deep in discussion with him I have perused from his loan amortization schedule that tenure of loan also has got extended from 30 years to around 42 years along with increase in EMI from ~₹25k to ~₹30k (for outstanding loan amount of ~ ₹35lacs). The reason behind such abnormality, was hike in rate of interest from ~7% (applicable rate at the time when loan sanction) to ~9.5% (currently applicable rate of interest). 

This might be the situation for most of the people who has borrowed for forming his/her dream home and many of you have also taken the right actions on time by managing finance and taking control of the same.

But folks…"BETTER LATE THAN THE NEVER"  So, lets dig on the ways to manage and take control of finances and actions can be taken for the same.

(Interest Rates may very based on your financial institution from where you have taken the Home Loan)

1. SAME EMI – EXTENDED LOAN TENURE

When your interest rate gets revised upward/downward financial institution will increase/decrease your loan tenure and revise very minimal or keep same EMI. The effect of the same is in favour of the financial institutions as longer loan tenure increases the burden of the Interest on the borrower.

Under this scenario one may observe that the total amount of interest which will going to be paid over the tenure of the loan will get increased and accordingly one will end up with paying higher interest. 

This option is recommended only when the borrower is unable to take additional financial burden of higher EMI effected due to revision in rate of interest because of having certain financial liabilities on hand and thus, one should not get overburdened with increased amount of EMIs.

2. INCREASE EMI – KEEPEING SAME LOAN TENURE

Now, as opposite to 1st scenario above, in this scenario, with increased rate of interest one can opt for increase in EMI, which will lead to save on interest component of EMIs and the Loan tenure remains the same.

For the same tenure as availed at the time of loan sanction, one can compensate interest effect by paying higher EMI and thereby the overall interest burden will not get exaggerated but will be controlled.

3. PRE-PAYMENT – LUMP SUM AMOUNT

This is must to save on the interest and to reduce loan tenure. 

As an employee this can be done at the time of receiving bonus, leave encashment, salary increments, etc.

To make this simpler, one can try to pay additional 3 EMIs i.e., 15 EMIs a year. The additional 3 EMIs can be spread for 12 months as per availability of funds. This will reduce your loan tenure and the effect of Interest portion can be minimized.

4. NEGOTIATING RATE OF INTEREST WITH CURRENT LENDER

When interest rates are keep increasing, you can ask your lender to revise the interest rate and they may offer you the revised reduced rate of interest based on your past performance over loan repayment and the available rights they have. Believe me, this option always works, when you approach your lender, they will be having options, there is always some flexibility available in their powers and to retain their customer they will provide you with the best offer.

Based on my experience, the range of 0.6% to 1% is being considered in negotiations for rate reduction. 

5. TRANSFER LOAN BALANCE TO NEW LENDER 

Now, after trying all the options with current lender if you still find it unsatisfactory and find that your financial institution is charging you more as compared to other Financial Institutions, you should try to reach out to different lenders. Check out the rate they are offering, based on your current CIBIL score and aspects of lending. It will be lower than your current interest rate.

This will involve additional charges for switching the loan from one to another, which includes processing fees, transfer charges, pre-payment charges etc. One should check this before taking any decision.

Here, since you are switching over to new lender, all the paperwork and documentations will be done afresh and thus it will be some time consuming.

The above was explained in theoretical terms, now let me take you through the numbers for understanding it in better ways.

Let’s assume that one is having home loan of ₹ 35 lacs taken @7% p.a. for 15 years and due to hike in the rates of interest currently it is @ 9.5% p.a.

1. SAME EMI – LONGER TENURE

2. INCREASED EMI – SAME TENURE

3. PRE-PAYMENT – LUMP SUM AMOUNT

Assuming, every year 3 additional EMIs will be paid 

@ 7% - If we pay 3Instalment (approx. ₹.95thouand) additional on a yearly basis for 10years (approx. ₹.9.4lakhs) you can be able to save interest amount ₹. 6.65 lakhs approx. and tenure will reduce by 4years.

@9.5% revised rate after 1year of loan (Scenario 1-base tenure) - If we pay 3Instalment additional on a yearly basis for 12years you can be able to save interest amount ₹. 6 lakhs approx. and tenure will reduce by 8years (250months to 152months)

4. NEGOTIATING RATE OF INTEREST WITH CURRENT LENDER

5. TRANSFER LOAN BALANCE TO NEW LENDER 

Assuming, offer rate from new lender is 8.5% 

Upshot – You can save interest of approx. ₹.12.10 lakhs of amount by transferring the loan to other lender with reduced interest rate by 1%. (Also note there would be some other charges may applicable while transferring the loan, that also need to factor from above calculated benefit)

This is my way to analyse the impact of interest rates on my finances and I think it will be insightful to people searching out for loan financing options. 

If anyone of you want the base sheet for calculation, kindly write me on mrinkblog@gmail.com.

Advisory/Disclaimer: The above article/paper is only to enable public to have a quick and an easy understanding. Viewers are advised to ascertain the correct position before relying upon any document/figures.