Why even a 1% rate cut on home loans matter

Why does even a small cut in the home loan rates make such a substantial difference? If you have dismissed minor changes of 0.5% or even 1% on your home loan rates when your bank or HFC sends you an intimation on the change, think again.

How a 1% can make a big difference?

Going by simple maths, a rate cut of 1% on a Rs. 90 Lakh loan can mean a savings of Rs.15 Lakhs over a 20 year tenure of the loan. Banks also offer teaser and fixed rate loans which have their own nuances. Usually novice customers choose loans primarily based on the interest rates offered by the bank.

The table below gives a good illustration of the same.

Loan  amount (Rs)	Tenure (years)	Saving on interest rate	Saving amount saved (Rs)
50 lakh	20	1%	7.94 lakh
50 lakh	15	1%	5.5 lakh
90 lakh	20	1%	15 lakh
90 lakh	15	1%	9.9 lakh

The good part - If you are trying to save tax, home loans can also offer up to Rs.1,50,000 tax exemption to customers for the interest paid component of the loan and thus reduce your taxable income.

Why should you understand all aspects of your loan?

Take the case of this customer, who went for a bank loan with a government run bank in 2011 at a rate of 10.5% for a 10 Lakh loan. Over the last year the bank changed the home loan rate to more than 13% and to the customers disillusionment, this was done without any intimation. In the end the customer had to run from pillar to post to shift his home loan to another private bank which was currently offering a lower home loan rate.

One has to keep in mind foreclosure, franking charges, processing charges and a host of other things when choosing your loan. Also the fact that the interest on a home loan can almost touch the loan itself by end of its tenure for a 20 year loan, one has to devise good investment plans to pre-close and start paying off the prinicipal in the initial 10 years of the loan (which is when you get the maximum benefit). Pre-closing later than this offers little benefits.

For further questions on which banks to go for your home loan, what factors you must consider etc. you can write to us at nandanamconsultants@gmail.com and get a free consultation or meeting with our experts.