Your home loan deserves 30 minutes (Part 2)
What a fall in interest rates could mean for you.
Part 1 talked about why one can not completely rely on banks to pass on reduced interest rates to home loan customers. And why the borrower must do the hard work to find out the facts and negotiate with their bank if necessary. The 15 minutes will be well spent. The potential rewards are too large to ignore.
And this brings us to the next 15 minutes. While Part 1 focused more on fact finding, Part 2 is all about decision making.
The tougher 15 mins
Once the new (lower) interest rates have been applied to your loan, you have two options.
(i) Enjoy the reduced EMI
(ii) Choose to pay the Old EMI
Well, here is what happens next. As mentioned in Part 1, the bank has two weapons in its arsenal — interest rate and loan tenure. Remember, as either of them rise, so does your interest payout. Consequently, if either of them fall, so does your interest payout.
Given your successful negotiation on interest rates, banks deploy their second weapon: loan tenure.
The bank immediately lowers your EMI, keeping your loan tenure the same. You’re happy as you start to pay less every month. And that may very well be the desired outcome for you.
What you need to know is that you have an option.
An option, to keep paying the old EMI and use the lower interest rate to reduce your loan tenure. Here’s the impact.
If you choose to continue paying the old EMI amount of 1.96 Lacs, you could very well reduce your loan tenure by one and a half years. Thus reducing your total interest payout. A further 15 Lacs of savings is worth thinking about for 15 minutes.
So how should you proceed
- If your income is extremely stable and secure (remember these are unpredictable times), consider keeping your EMI the same as before and instead, reduce your loan tenure. You stand to reduce your interest burden.
- If you are not so sure about your income, just stick with the reduced EMI and the old tenure. If possible, start putting aside some money every month. Once you have a decent amount, use it to make part payments toward your loan and reduce your principal amount.
Under no circumstances should you put pressure on your monthly cash flow. Times are tough, and it’s better to err on the side of caution.
If you want to discuss your particular case, do reach out by joining our Telegram channel.
This article contains the opinion of the authors and not financial advice.