Saturday, March 12, 2011

Can Low Interest Rates Help My Home Loan

. Saturday, March 12, 2011

The RBI has just reduced interest rates again. So, the obvious question to ask us is how do these lower rates help us.
Well, the immediate impact of the rate reduction is that the banks and the housing finance companies are also going to reduce the rates they lend money at. Sometime before the end of January 2009 most of these lenders will bring their rates down and home loans will become more affordable than they were say six months ago.

By way of indication, it is expected that home loans rates for loans below Rs. 20 lakhs will settle around 9.5% and those for loans above Rs. 20 lakhs will be around 10.5% These rates are indicative of floating rate home loans only. Also, each bank has its own conditions on these rates, e.g., some of these loans are for a fixed term of 5 years but not longer. These reduced rates are about 2% lower than what rates were a few months back. Clearly, this is can be beneficial to someone taking a home loan right now.
Just to illustrate with an example, think of the rate cut giving you a substantial discount on your home loan. On a Rs. 30 lakh loan for 20 years, if the interest rate came down from 12% to 10.25%, it would result in your monthly EMI coming down from Rs. 33,033 to Rs. 29,449, resulting in savings of Rs. 3,584, or close to 11% of the old EMI.

want to calculate my EMI Payments - take me to the EMI calculator.
Could the rates go even lower? While no one has seen the future, one can say that for the next few months we are entering a lower interest rate environment. Any further rate reductions will depend upon what kind of a boost (or stimulus) the policy makers like the RBI or the Government want to offer.
So the obvious question to ask is should I take a home loan now or wait? Its almost impossible to time the low point in interest rates. Also, if the rates become really low, chances are that the value of the home (i.e., the asset for which you are taking a loan) will be rise. So net net, you might not gain much by waiting for the lowest level of interest rate.
But what if you say that I already have an existing loan, and want to avail of these lower rates... ..well, too bad these new rates cannot help you. These rates are only for new loans. However, all is not lost, you might be able to refinance (or balance transfer) your loan to a new lender offering cheaper rates. And this is what the next article is all about....
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