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Lowering your home loan interest burden

Lowering your home loan interest burden

Negotiating the best deal on your home loan is a good start, but doesn’t last long. In a couple of years, you’ll notice that cheaper loans are up for grabs, even from your own bank.

At the time of getting a home loan, finding the lowest interest rate – and then bargaining to reduce it further – is crucial. Even a difference of 0.25% would make a big difference to your EMI in the long run, you think. But remember that, with a floating interest rate on your home loan, these differences could get ironed out pretty quickly. Banks are more generous to newer customers. This is why, if you’re in your third or fourth year of repayment, you’ll notice that new customers are being offered much lower rates than you. Here’s what could happen with floating rates once you’ve begun repaying your loan:

What will happen:

Changes in tenure
Every quarter, banks decide what the rate on your home loan will be. Since the rate can be altered several times during the course of repayment, the EMI on your loan doesn’t change. Instead, banks change the tenure of your loan. So despite rate cuts, you’ll notice that it’s just the repayment tenure that reduces. If, for example, you have a Rs50 lakh loan with a rate of 11% over 20 years, your EMI would be Rs51,609. If the rate were to reduce by 0.5% (50 basis points), your EMI should’ve reduced to Rs49,919. But this won’t happen. The bank will, however, reduce the tenure by nearly a year in this case. Unless you’re in a sticky financial situation, you should accept this. A reduced tenure amounts to the same as a reduced EMI. After all, to get a reduction in the EMI, you will have to fill in paperwork to change the ECS mandate. What really matters is when you find that newer customers are being offered lower interest rates than you.

What you can do:

Reset your interest rate
If you’re paying more than what new customers are being offered, what you could do is reset your loan rate. This may not seem like something you need to ask for, let alone pay for, but you must. Every bank has its own rate for realigning your interest rate with the one being offered to its newest customers. Some charge 0.5% of the total outstanding amount of your loan, while others may charge half of what the difference is. If your credit score has shifted downward since you took the loan, you may have to pay a higher fee or even be refused the offer.

It’s a one-time payment, but keep in mind that this, too, won’t be forever. After a few quarters, these rates may also be higher than those being offered to new customers. Typically, though, the longer you have left to repay your loan, the more sense it will make to reset it. A couple of percentage points on a Rs50 lakh loan over 12 to 15 years could result in savings of well above Rs10 lakhs. On the other hand, it would cost you just Rs50,000 to make the change if your lender is charging a processing fee of 1%.

Transfer your balance
With the removal of the pre-payment penalty, you can finally transfer your loan to any bank. Just as it costs money to reset your loan, it costs money to transfer it. Surprisingly, though, there’s no difference in payment. Transferring your loan generally involves the payment of a flat fee, of 0.5%, but lots of paperwork. In fact, transferring your balance could even be cheaper than resetting your loan rate. Before doing so, one thing to compare is how quick your bank is to changing its rates when the RBI lowers rates, as compared to the bank you’re considering shifting to. Generally, public sector banks, under pressure from the finance ministry, are quicker to respond.

As with resetting your loan, with balance transfers, too, the earlier you switch, the larger the amount you’ll save. If you have 15 years left on your loan and another bank is offering you 0.5% less in interest, it could reduce your loan tenure by a year; if you have 10 years left, it will be around four months.

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