Do you have a home loan? Here’s how to make the most of low interest rates

If you have been repaying a home loan, you would have noticed the gradual lowering of interest rates over the last couple of years. Home loan interest rates are the lowest they’ve been in the last several years. And with the effects of the demonetisation process, banks led another round of rate cuts, which brought the lowest home loan rate on offer to 8.35%.

The RBI did not reduce lending rates in the last two monetary policy reviews. The central bank thus signaled that interest rates may have bottomed out, with little chance of another cut happening in the near future. The ICICI CEO Chanda Kochhar said as much recently. “A large part of the lending rates cut has already happened,” she told CNBC-TV18. “An immediate cut is unlikely.”

What This Means For Home Owners

As someone paying EMIs towards your loan, you have broadly two choices. One – you’re not happy with the rate of interest you’re paying. You want to pay a lower interest rate which is in alignment with prevailing rates.

Two – you’re happy with the rate you’re paying, and you want to make the most of this bottoming out.

Let’s take a look at your options in both these scenarios.

Option 1: Move To An MCLR-Linked Loan

If you feel your home loan interest rate doesn’t align with the general lowering of interest rates, you can consider transferring to another loan with a lower rate. There are two ways you can do this.

The first is by approaching your current lending institution and asking for transfer to an MCLR-linked loan. These MCLR-linked loans, which came into force from April 1, 2016, are more responsive to RBI’s rate cuts, and mention fixed intervals at which they will revise their rates as per the prevailing market conditions. Transferring your loan with your current lending institution will not entail any processing fees and charges.

The second is by transferring your loan to another lending institution offering a more competitive rate. You can compare various loan products online before settling on the one best suited to your requirement. Transferring to another lender means having to pay processing fees and a pre-closure penalty which is usually a percentage of your loan balance. Before you take this option, do carefully evaluate your long-term net savings from the transfer while also taking into account the costs of transfer.

Option 2: Stay With Your Loan, And Pre-Pay On It

Let’s say you’re satisfied with where your loan interest rate is. With the markets signaling a bottoming out of interest rates, you have a great window for pre-payment. When the interest rates are low, you have the chance to repay a part of your loan at a cheaper rate, thus reducing your long-term interest outgo, thus reducing the overall cost of the loan.

Let’s try and understand this with an example. Let’s say you have taken a home loan five years ago. You borrowed Rs. 50 lakh at 10%. You have paid 60 EMIs. And now you want to make your pre-payment. When you pre-pay with a low interest rate, you make greater progress in reducing your loan balance. Here’s how.



As you can see, by pre-paying at a lower interest rate, the borrower secured an additional savings of Rs. 433,874.97, helping us understand that pre-paying when interest rates are low help make greater impact with reducing the loan balance.

With interest rates trending at a low, it’s time for you to take stock of your home loan and take decisions that would hopefully help you save lakhs of rupees in the long term. For clarity, approach your lender for interest and savings calculations, or go DIY and figure out these sums yourself. If you do choose to transfer your loan, pick a loan product after a thorough analysis of transfer costs and long-term savings.

(The writer is CEO, BankBazaar.com)