The Buyt Desk
Home loan prepayment means you either make a partial or full payment of your loan amount before the planned repayment period. It helps in reducing the EMI burdens or reducing interest rates. When you get a home loan, you will find that the loan principal gets paid off at a slower pace during the starting years. Hence, it is good to make prepayments earlier in tenure than later on.
For example, you get a home loan of INR 50 lakh at an 8% interest rate for 25 years with INR 38,591 monthly EMI. For 25 years of the whole tenure, you will end up paying a total amount of approximately INR 65.8 lakh including interest.
In the first 5 years of regular EMI payments, which is 20% of 25 years of loan tenure, just 7.7% of the loan is paid off. In the next 5 years, just 19.2% of the total loan is repaid. So, there would be an increase of 11.5% in the loan paid off from the initial five years to the next five years. By the end of the third set of five years, about 36.4% is paid off. This is an increase of 17.2% from the second set. By the end of 4th set of five years, about 61.9% of the loan is paid off, which is a rise of 38.1%. In the last set of tenures, 100% of the amount is paid off.
RBI Rate Hike
Reserve Bank of India (RBI) has announced a 35 (bps) basis-point increase in the repo rate to 6.25%. The central bank has increased rates by a cumulative 225 bps because it began the rate-tightening cycle in May 2022. These hikes are affecting individual borrowers who are planning or have purchased a car and consumer durable, and floating-rate home loans. This year, all customer loans have turned costlier. Consumers are under the burden of mounting interest rates and increasing EMIs (equated monthly installments).
Impact of Rate Hike on Home Loan Purchasers
Home loans associated with repo rates have the immediate transmission of rising policy rates. Many banks have completely passed on the repo rate rise of 190 bps to home loan customers. This hike has increased a loan tenure of about 13 years for consumers who have initially chosen 20 years loan period believing that they had borrowed a home loan at 6% at the home purchase time. Borrowers who preferred an EMI rise rather than a loan tenure rise have observed their EMI increase by about 20%.
The complete home loan eligibility of the new consumers is reduced by 40% with a recent repo rate hike. However, people who are planning to get home loans should never time their home-purchasing decision depending on policy rate movement trends.
Existing home loan purchasers who notice crucial improvements in their credit profile after getting a home loan can start a home loan balance transfer to lower their interest costs. The improved credit profile provides them the eligibility to move the existing home loans to other lenders at comparatively lower interest rates.
Use Prepayment Strategy
To reduce the loan tenure, customers can use the prepayment strategy. Long-term loans like home loans facilitate consumers to make part pre-payments. Think about your home loan repayment strategy and make pre-payments to save on increasing interest costs. Adding an extra thousand monthly can lessen your interest payout over the long term. It would help you in shortening the ballooning loan tenure.
The right time to re-pay your home loans is while getting the annual bonus. Allocate a certain portion of your bonus to prepay the housing loan each year.
The constant rate hikes may result in short-term turbulence in the complete housing demand when purchasers are optimistic about taking a home-buying decision. This may even be included in the overall acquisition cost of the buyer. The lower interest rates have been considered the major parameter in the resurgence of real estate demand over the past few years. Therefore, the rate hike would often become an obstacle to affordability.
It is believed that there is a crucial pent-up demand from a huge population base and first-time home purchasers.
