Buying a house was earlier only an option for those who had enough capital to make the purchase. However, today, with the help of home loans, people in their 20s are dreaming of buying their own houses too. While there are great housing loan plans out there, it is also important to understand that applying for one is going to be a long-term commitment. The repayment of the loan has to be planned even before getting the loan amount, keeping in mind the interest payments.
Many borrowers have faced problems with the repayment of their home loans, and many times the reason is that they have not understood the impact of the home loan rate. So, before applying for a home loan, make sure to be thorough with the loan’s interest rate.
- What does a change in the home loan interest rate mean?
Reserve Bank of India (RBI) takes periodical decisions of increasing or decreasing the repo rate, which as a result affects the home loan interest rates charged by lenders too. If the interest rate decreases, it works to benefit the borrowers since the interest rates of their loans are most likely to fall too. However, if the interest rate goes up, the monthly instalments face an increase. Lenders can also permit you to maintain the EMIs of the home loan by decreasing or increasing the repayment tenure.
- Can a slight difference in the interest rate make much of a difference?
Most borrowers apply for home loan plans and choose a long repayment tenure. The reason for this is that the monthly instalments are easier to pay in smaller amounts. However, the interest keeps adding with each EMI. This is the reason that even a slight difference in the interest rate can make a significant difference to the total cost of the loan.
For instance, let us assume you take a home loan of Rs 80 lakh and plan to repay it in 20 years. The lender charges you interest at 6.5%. This puts your monthly instalments at Rs 59,646. However, if you had taken the same loan with an interest rate of 7.0%, your monthly instalments would have cost Rs 62,024. Now the difference in both EMIs might not seem as much, but if look at the larger picture, it makes a significant difference. With the interest set at 6.5%, the interest payable after 20 years is Rs 63,15,004 and the total amount payable is Rs 1,43,15,004. If the interest is 7%, the interest payable after 20 years is Rs 68,85,740 and the total amount payable is Rs 1,48,85,740. This means that a 0.5% difference in this loan plan could result in you paying Rs 5,70,736 more.
This is the reason why it is very important to focus on the housing loan interest rate as it can make quite the difference in the total cost of your loan. Always make use of a home loan EMI calculator to get an estimate of the monthly instalments. Doing this will help you understand whether to accept a loan offer or look for a different lender.