Owning an own house is everyone’s dream. But turning this dream into reality is not an easy task. With the skyrocketing cost of houses especially in metro cities, it is really difficult for a common man to go for a house purchase easily. A lot of planning is needed in terms of arranging the finances needed to fund this goal.
With easy credit availability, most of the buyers rely on the home loan. Banks and NBFCs are also offering maximum loans possible as well with easy processing. So many times, buyers get tempted with this easy loan and end up buying property at a higher cost by stretching their budgets.
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House buying normally is funded with an owned fund in the form of downpayment and borrowed funds from Banks and NBFCs. It is being observed that buyers go with the maximum possible allotted loan amount so that it can help them to raise less down payment. But when you go with a higher home loan you need to bear higher EMI.
A buyer has to accommodate this house EMI along with monthly expenses as well as monthly investments required for achieving financial goals. So it is very important for the home buyer to stick with the budget as well as keep some room for increase in interest rate in respect to home EMI as well as loan term.
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Let’s understand it with an example: Few months back a new home loan was offered at 6.67% at that time if a buyer took a home loan of 75 lakhs for 10 years then the per month EMI would be around ₹85,811 for next 10 years.
Now with increased repo rate by RBI current interest rate by banks for good cibil score is 7.55%. In this case with the same loan amount and with the same loan term the monthly interest will increase by Rs. 3,400 and the total interest payment will be increased by ₹4.10 lakhs.
The impact of an increase in interest rate is more if the term of the loan is longer. If we consider the same loan amount for 20 years home loan then with 6.67% this will be the total interest payment.
If we consider the same loan amount for a 20 years home loan then with 7.55% this will be the total interest payment. So with longer tenure you end up paying 9 lakhs more at the end of the term.
That is why one should have the bandwidth to prepay the loan whenever there is an increase in interest rate so that they do not need to pay excess interest amount.
Preeti Zende is a SEBI registered Investment Adviser and Fee only financial Planner. She is Founder and owner of Apana Dhan Financial Services, Associate of Insurance Institute of India.
