How to Use Fall in Home Loan Rates to Reduce Your EMIs & Invest in Your Future?

Updated on: 19 Jan 2024 // 4 min read // Home Loans
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Since March 2024, we have seen a marked reduction in Home Loan Interest Rates. With lowest Home Loan Rates reaching 8.50% p.a., it is time you consider the balance transfer of your existing Housing Loan. Most public and private sector banks are offering Home Loans starting from 8.50% p.a. and there is no point continuing serving a higher rate of interest.

For all those with Repo-Linked Home Loans, the benefit of rate cut will automatically be transferred, however if your loan is linked to MCLR, chances are high that it may take many months or 2-3 quarters to reap the low rate benefit. Amid Covid Times, besides the cash crunch, you have a double sword of managing EMIs and continue saving for future while meeting your day-to-day expenses.

So, let’s dive deep and find out how to make most of the falling Home Loan Interest Rates and reduce EMI burden while saving some cash for tomorrow. Yes, with some simple re-sets you can save sufficient cash today and take care of your future needs effortlessly.

Home Loan Balance Transfer

Amid falling interest rate regime, Home Loan Interest Rates have plunged more than 130 basis points. If you are still serving a high rate of interest and your loan is still in the first or second quarter of the tenure, it’s advisable to opt for a balance transfer and switch the lender. Take an immediate call, if you are eligible for 60 to 80 bps lower Interest Rate for Home Loan.

You can check your home eligibility online and make an informed decision.

Let’s understand this with an example.

Home Loan Balance Amount@8.70 p.a. for 15 years     
(Total Interest Liability)
@8.50 p.a. for 15 years
40,00,000Rs 31,74,786Rs 30,90,125
EMI- Rs 39,860EMI- Rs 39,390

Thus, a simple step of switching the lender will save you Rs 84,661 in the interest payment across the loan tenure. You can use a Home Loan EMI Calculator and assess the impact of balance transfer on your Home Loan.

All the more, if you decide to extend the tenure, the monthly saving will be even sharper, though it will increase the overall cost of loan. Let’s see the result if you extend tenure by 5 years.

Amid Covid Crisis, if your monthly income is affected the additional funds should help you take care of your other expenses, including Credit Card Bills or kid’s tuition fee.

However, if you are already taking care of those expenses, let’s further explore how you can use these funds for your future financial health.

Mutual Funds- SIP Rout

You can build wealth if you consistently invest in market-linked products for long term. In the given example if you decide to start an SIP of Rs 6700 for 20 years, you will build the wealth of over Rs 50 Lakh at average return of 10%. In such a long term, it is viable to earn even higher rate of interest ranging between 12-15% and thus you can make a much bigger corpus comfortably.

By paying around 6,77,857 more on your Home Loan, you will be able to make a corpus along with your Home at the end of the tenure.

Partly Prepay at Regular Intervals

Furthermore, you can keep your home liability low by making regular prepayments. This is one of the best strategies to cut down the cost of interest rate on your Home Loan. It should be noted here that Home Loan Prepayment has no foreclosure charges and thus you can pay out as per your financial health and cash flows in hand.

Some of the effortless ways to save for annual part prepayment of your Home Loan are aligning your windfall gains and annual bonus towards the prepayment. By prepaying your loan, you can substantially cut down the loan tenure and further save on the overall interest cost.

Alternatively you can also pay additional EMI each month. Since there is no penalty on prepayment of Home Loan, you can choose a suitable method of prepayment and save money.

Why reduce EMI, if I have to pay additional amount each month? This is an opt question here. Think over, if your EMI is high, you are bound to service that amount each month. However when you are paying out voluntarily high amount, there is no pressure to meet this liability each month. 20 years is a long time and you may face cash crunch in some years where paying out an EMI is nothing more than a financial burden. So it is advisable to keep the EMIs low, so that you can pay out each month without hurting your lifestyle. Also, we have analysed above, running a small SIP along can help gain more value for money.

Leverage Home Loan Overdraft for Paying Out Other Liabilities

You can use Home Loan Overdraft facility to avail funds for emergency situation. Generally your lender will extend overdraft amount at same or up to 1 % higher than your Home Loan Interest Rate. In current times you can use a Home Loan to pay out for short & expensive unsecured loans. You do not need to opt for Moratorium and add additional interest burden on your shoulders.

Besides low interest rate you will enjoy following benefits with an OD account:

  • Interest is levied only on the amount utilised.
  • You get complete repayment flexibility.
  • You can prepay without any additional penalty.
  • EMIs can be set as interest-only payments.

Final Take

These are unprecedented times and it is advisable to make thorough cost benefit analysis before making any financial decision. For example, do assess the cost of switching a lender or prepaying for any account. The terms and conditions vary across the lenders so it important to understand the decision. One thing is for sure- you are already serving a Home Loan, which is a long term commitment. Your commitment to pay out your EMIs consistently will not only help you improve your credit score but will also help out to make many more smart financial decisions along.