Everyone knows that loans are about interest rates. Lower rates are good for borrowers and higher rates are good for lenders. Plain and simple.
But borrowing in general should be avoided unless it’s necessary. Atleast in case of real estate, it can be said that its unavoidable as the cost of properties is extremely high these days.
At times, people make the mistake of underestimating the impact of lower interest rates. If their existing bank is offering them 10.5% and a new lender is giving 10% rate, they will still stick with higher priced bank. They believe that a difference of 0.5% doesn’t amount to much. But they are mistaken.
How? Let us explain it to you with some basic mathematics.
Suppose you need to take a housing loan of Rs 50 lac for 15 years. What is the impact of change in interest rate on EMIs?
Here it is:
At 9.0%, the monthly EMI is Rs 50,713 (Total Interest – Rs 41 lacs)
At 9.5%, the monthly EMI is Rs 52,211 (Total Interest – Rs 44 lacs)
At 10.0%, the monthly EMI is Rs 53,730 (Total Interest – Rs 47 lacs)
At 10.5%, the monthly EMI is Rs 55,270 (Total Interest – Rs 49 lacs)
At 11.0%, the monthly EMI is Rs 56,830 (Total Interest – Rs 52 lacs)
As you can see, higher the rate of interest is, higher will be the monthly EMI. Also, the difference in total interest outgo during the 15-year tenure is several lacs for each 0.5% change in borrowing rates.
Opting for longer tenure too can reduce your EMIs. But that will cost you more in terms of total interest being paid. So the key to lower EMIs is lower interest rate.
Therefore, remember that whenever you are planning to take a home loan, do shop around a bit to see what is on offer. You can really save several lacs if you can even get your borrowing rates reduced by a small percentage.