Learn about switching home loan costs!

Learn about switching home loan costs!

Over the last few quarters, the RBI has lowered the repo rate by 0.5 per cent, which has been followed by rate cuts by banks and lenders. This has resulted in lower home loan rates. In fact, the falling interest rate cycle has just begun. Indraneel has a home loan of Rs 55 lakhs that he took at an interest of 11.00 per cent. The tenure of his loan is 25 years. Five years down the line, he wants tswitching home loan costso refinance his home loan for the remaining tenure at an interest of 11.50 per cent to take advantage of the falling interest rate cycle. Will this be a wise decision?  The new rate is applicable for new borrowers and not existing ones. Should he opt for a balance transfer to another lender?

Many existing borrowers are looking to switch their home loan to another lender in order to take advantage of the new rate and lower their EMIs. When done properly, refinancing can be very beneficial.

 However, before Indraneel goes any further, he must carry out a thorough cost benefit analysis. It is important to time the loan refinancing in a way that saving on interest payable is maximized.

Indraneel is likely to find switching lucrative as only five years of his loan tenure are over, which means a large portion of his principal is outstanding, as his EMI is mostly made up of the interest component. With time, the interest component comes down and principal component goes up. 

There is no prepayment charge on floating rate loans, but some fixed rate loans may have it. 

Indraneel must check if his lender will levy the same if he were to prepay and switch lenders. The loan processing charge of the new lender is the second part of the cost that should also be considered. A high processing fee may make the new loan quite expensive. Indraneel must also consider the hassles of repeated paper work that goes into transferring the home loan from one bank to another.

Therefore, instead of making the switch decision by purely considering the interest rate differential, Indraneel must make sure that he factors in all these costs when computing the potential savings. Needless to say, refinancing is a profitable move only when the potential savings in the long run are significant.

Cost of switching  : 

Pre-payment charges (if any) + Processing fee + Legal charges (if any) + Yearly home insurance (if the lender says its must) + Other hidden charges ( SMS charges +

Provisional Statement charges + Pre-payment charges + Change of tenure charges + Change of EMI charges )

Benefit of switching using LoanYantra.com :

Helps in minimizing the cost of switching and makes this process smooth.  Your 1-day of your work with LoanYantra.com can save your 3-years of your salary.  Use the balance transfer calculator to check what you can save.

How to use home loan EMI calculator for calculating the EMI?

How to use home loan EMI calculator for calculating the EMI?

What is EMI?

Equated Monthly Installment – EMI for short – is the amount payable every month to the bank or any other financial institution until the loan amount is fully paid off. It consists of the interest on loan as well as part of the principal amount to be repaid. The sum of principal amount and interest is divided by the tenure, i.e., number of months, in which the loan has to be repaid. This amount has to be paid monthly. The interest component of the EMI would be larger during the initial months and gradually reduce with each payment. The exact percentage allocated towards payment of the principal depends on the interest rate. Even though your monthly EMI payment won’t change, the proportion of principal and interest components will change with time. With each successive payment, you’ll pay more towards the principal and less in interest.

Here’s the formula to calculate EMI:

where

E is EMI

P is Principal Loan Amount

r is rate of interest calculated on monthly basis. (i.e., r = Rate of Annual interest/12/100. If rate of interest is 10.5% per annum, then r = 10.5/12/100=0.00875)

n is loan term / tenure / duration in number of months

For example, if you borrow ₹10,00,000 from the bank at 10.5% annual interest for a period of 10 years (i.e., 120 months), then EMI = ₹10,00,000 * 0.00875 * (1 + 0.00875)120 / ((1 + 0.00875)120 – 1) = ₹13,493. i.e., you will have to pay ₹13,493 for 120 months to repay the entire loan amount. The total amount payable will be ₹13,493 * 120 = ₹16,19,220 that includes ₹6,19,220 as interest toward the loan.

Computing EMI for different combinations of principal loan amount, interest rates and loan term using the above EMI formula by hand is time consuming, complex and error prone. Our EMI calculator automates this calculation for you and gives you the result in a split second along with visual charts displaying payment schedule and the break-up of total payment.

How to use LoanYantra.com Home Loan EMI Calculator?

With colourful charts and instant results, our EMI calculator is easy to use, intuitive to understand and is quick to perform. You can calculate EMI for home loan and personal loan, education loan or any other fully amortizing loan using this calculator.

Enter the following information in the home loan EMI calculator:

  • Principal loan amount you wish to avail (rupees)
  • Loan term (months or years)
  • Rate of interest (percentage)
  • EMI in advance OR EMI in arrears (for car loan only)

Use the slider to adjust the values in the EMI calculator form. If you need to enter more precise values, you can type the values directly in the relevant boxes provided above. As soon as the values are changed using the slider (or hit the ‘tab’ key after entering the values directly in the input fields), EMI calculator will re-calculate your monthly payment (EMI) amount.

A pie chart depicting the break-up of total payment (i.e., total principal vs. total interest payable) is also displayed. It displays the percentage of total interest versus principal amount in the sum total of all payments made against the loan. The payment schedule table showing payments made every month / year for the entire loan duration is displayed along with a chart showing interest and principal components paid each year. A portion of each payment is for the interest while the remaining amount is applied towards the principal balance. During initial loan period, a large portion of each payment is devoted to interest. With passage of time, larger portions pay down the principal. The payment schedule also shows the intermediate outstanding balance for each year which will be carried over to the next year.

Floating Rate EMI Calculation

We suggest that you calculate floating / variable rate EMI by taking into consideration two opposite scenarios, i.e., optimistic (deflationary) and pessimistic (inflationary) scenario. Loan amount and loan tenure, two components required to calculate the EMI are under your control; i.e., you are going to decide how much loan you have to borrow and how long your loan tenure should be. But interest rate is decided by the banks & HFCs based on rates and policies set by RBI. As a borrower, you should consider the two extreme possibilities of increase and decrease in the rate of interest and calculate how much would be your EMI under these two conditions. Such calculation will help you decide how much EMI is affordable, how long your loan tenure should be and how much you should borrow.

Optimistic (deflationary) scenario: Assume that the rate of interest comes down by 1% – 3% from the present rate. Consider this situation and calculate your EMI. In this situation, your EMI will come down or you may opt to shorten the loan tenure. Ex: If you avail home loan to purchase a house as an investment, then optimistic scenario enables you to compare this with other investment opportunities.

Pessimistic (inflationary) scenario: In the same way, assume that the rate of interest is hiked by 1% – 3%. Is it possible for you to continue to pay the EMI without much struggle? Even a 2% increase in rate of interest can result in significant rise in your monthly payment for the entire loan tenure.

Such calculation helps you to plan for such future possibilities. When you take a loan, you are making a financial commitment for next few months, years or decades. So consider the best as well as worst cases…and be ready for both. In short, hope for the best but be prepared for the worst!