Which option to choose for Home Loan interest rate rescheduling

POSTED BY Ashesh Bharadwaj ON May 19, 2012 1:52 pm COMMENTS (9)

I have taken a home loan with current outstanding balance of around 16.5 Lacs. The bank is charging 13.75% interest rate.

Today I went to the branch and discussed various options to bring down the rate. Here are the options I was given:

For an amount of 9000 approx. (.5%) I can

#1 Get a 10.5 % floating rate
#2 10.75% fixed rate for 2 years
#3 10.75% fixed rate for 3 years

For fixed rate if I do a pre payment in between then I will be charged around 2% on the EMI given during the period.

#4 I asked her what are the charges if pre pay and switch to other bank as new loan since the new loans at available at around 10%. She said there would be no charges from their side but other bank will charge processing fees etc. and the hassles. She said for the .5% difference it would not be worth it.

Any clear winner among these 4 options?

Also I am planning to request to increase my loan tenure. Currently it is 176 months(around 15 years). If I have to carry on with current loan then when shall I ask for this? right now or after the rescheduling of interest rate?

9 replies on this article “Which option to choose for Home Loan interest rate rescheduling”

  1. Balaji Tunuguntla says:

    HDFC has fixed rate 11% for 10 years what about this option.

  2. Thanks Ashal for clarifying this issue 🙂

  3. Sachin says:

    Frankly speaking interest will go up or down is difficult to predict. So i disagree with Ashal here. RBI is maintaining repo rate high due to consistently high inflation rate going on for more than 2 years now. As as per the current state of our country and the willingness of Government it seems very thin chances that inflation will come down.
    So RBI wont reduce the repo rate.
    (Cant believe we have one of the best economist as PM and still economic situation of country is worst than earlier).

    @ Ashesh ,
    Your interest rate is high and you are doing good job by negotiating it with bank. Normally bank will go on increasing the rates immediately if RBI increases repo rate, but will not reduce it when RBI reduces rate, till customers comes to them and negotiate. Its a bloody business for them, especially for private banks. So everyone on this forum should also understand that banks are open to negotiate the interest rate anytime. If your bank rate is more say over 14% then take action immediately. Don’t sit idle taking sip of tea at home.

    Regarding the savings for going with new options is not difficult to calculate. Just open the excel sheet and put in the numbers and you will know the savings in 2-5-8015 years down the line. Do it yourself as it will be good learning.

    Sachin

    1. Thanks Sachin for the reply. It seems its not going to be easy to decide. I expected no less 😉

  4. Dear Ashesh, Why do you want to reduce the EMI from the current level?

    In general, the option1 is better than other 3 options. The primary reason is from here on wards, the interest rate ‘ll only decrease & ‘ll remain so for next 2-3 years or even more.

    Thanks

    Ashal

    1. Dear Ashal,

      Thanks for the reply.

      “Why do you want to reduce the EMI from the current level?”

      Tough question 😀 I am thinking to use the extra money in other investment where I can get better return than home loan interest rate.

      Thanks again for the clear answer to my question.

      1. Dear Ashesh, the basic query is already answered. the back calculation indicates that @ 10.5% ROI, the reduced EMI (if you want to exercise that option) ‘ll be around 18240 Rs. That’s a saving of 3600 Rs. appox. from your current EMI of 21877. This reduced EMI ‘ll close your loan in the same 176 months period. If you keep same EMI, the loan ‘ll be over in 124 months. That’s a saving of 52 months time.

        Now how much can you earn from this 3600 Rs. investing? Around 12L Rs in next 176 months period, if the ROI is 8%.

        Interestingly, if you do not touch your EMI now & start investing full EMI amount i.e. 21877 Rs. after the home loan closure, @ same 8% growth rate, the maturity amount ‘ll be 13.63L Rs. in remaining 52 months period (from 124 to 176 months)

        Take your own pick, either keep EMI same or reduce to invest else where.

        Thanks

        Ashal

        1. Thanks a lot Ashal for the calculation, things seem so clear when quantified 🙂

          There is one more thing which tilt me in favor of increasing the loan tenure. This home is for investment purpose so it might be possible that I dispose it off in few years. In this case reduced EMI will be more beneficial, right?

          1. Dear Ashesh, as the house in question is for investment purpose, how ‘ll you be benefited if the outstanding loan amount is more? If you opt to decrease your EMI, it means you are paying less money toward the principal, So down the line if you are selling your house say after 8Y, there may be 2 situations (not exact calculated nos. just providing examples) in 21K+ EMI, the outstanding loan amount is 6L Rs. but in 18K+ EMI, this O/S loan amount is 10L Rs.

            So in effect from your profit on sell, bank is going to earn more to close the loan.

            As simple as that.

            Thanks

            Ashal

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