Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?
Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.
Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.
This article is a part of our detailed article series on the concept of home loans. Ensure you have read the other parts here:
This article shows how paying a small fee to your bank to reduce your home loan rate can save you lakhs in interest over the life of your loan.
This article shows you the benefits due to interest saving when you make a part-payment to your home loan. Your loan duration also reduces due to the pre-payment.
This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.
This article helps you decide when to prepay your home loan - at the beginning, middle or end of the total loan period.
This articles describes overdraft home loans like SBI Maxgain and BOB Home Loan Advantage.
This post discusses managing when interest rates go up increasing your home loan EMI.
The bank gives a home loan to own the property while you use it until you pay back the loan via EMIs. An Equated Monthly Instalment plan (EMI) is a standard way to pay off a loan by making a fixed payment monthly that has both interest and principal in the same amount.
EMI = Principal + Interest
In each EMI, the split of the interest and principal changes since the interest is based on the outstanding loan balance at that point and the rest of the EMI is principal. As the chart shows, the interest part drops off with time, and the rest is the principal. The actual numbers in the chart relate to a ₹50 lakhs home loan taken at 8% for 25 years. The EMI is ₹38,591. The down payment amount is ₹12.5 lakhs.
You can test the numbers using this calculator:
As you pay back the loan, your ownership share in the house will increase in the same way. At the point of taking the loan, you own 20% of the house (12.5 out of 62.5 of which 50 is the loan). The bank owns 80%. As the loan is repaid, you own more and more of the house as the principal is paid off. This is the concept of building equity in an asset. Equity is the part of the asset you own after subtracting the part that the bank owns.
Home equity value = Current home value - Outstanding loan balance
Once you build equity in your home, that has additional benefits:
We break down the home loan rate into its major components to see where the fluctuations come from.
Repo linked Home loan rate = Repo Rate + Spread + Premium
Repo rate: This rate is decided by RBI. Home loan rates will move up and down as soon as RBI revises the Repo rate
The latest repo rate is 6.5%. This rate was last changed by RBI on 06 Apr 2023.
Spread: This is an additional rate on top of the repo rate that essentially captures the profit the bank can make off this loan relative to the deposits it offers to customers. This rate is generally revised every three years but will vary from bank to bank.
Premium: an extra value for some specific customers. E.g SBI adds another 15bps for non-salaried customers or will depend on the CIBIL score of the borrower. This value is also revised periodically like every three years.
Related:
This article explains how overall repo rate changes affect both borrowers and depositors.
This article shows you what to do if you wish to prepay your home loan so that your EMI and loan tenure remains same after a recent interest rate hike.
Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.If you are using Excel to calculate your home loan EMI, the formula to use is:
EMI = PMT(rate/12,time * 12,-principal,0,0)) where time = years left to pay the loan
Loan balance = PV(Rate / 12, time * 12,-EMI)
Metric | Value |
---|---|
Loan balance (₹ lakhs) | 50 |
Rate of interest | 8.0% |
Projected increase | 1.50% |
New rate of interest | 9.5% |
EMI | 47,783 |
Years left | 15 |
Prepaid amount (₹ lakhs) | 4.24 |
New loan balance (₹ lakhs) | 45.76 |
Prepayment % | 8.482% |
We will now show some calculations based on the amount of interest rate change applicable to you.
We can chain the payments. If you wish to reduce your interest rate by 1.5% say, you need the values from the 1% and 0.5% table and calculate the total reduction like this:
The general rule is:
Total prepayment = Principal * (1- PPT_1 %) * (PPT_2 %) for two prepayments
Total prepayment = Principal * (1- PPT_1 %) * (1- PPT_2 %) * (PPT_3 %) for three prepayments etc
This article shows how a single-income middle aged couple with two small children reach their retirement and children’s goals.
This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
This article explores how much return has come from the US stock market using data from the 1870s.
Published: 25 October 2023
8 MIN READ
This articles discusses some benefits and drawbacks of storing your mutual funds in demat mode with one killer feature that makes transmission possible.
Published: 1 November 2023
5 MIN READ
This article shows how an investor should invest a lump sum amount in the stock market when the market has reached an all time high.
Published: 10 December 2023
4 MIN READ
As the market keeps rising to new all-time high figures, how much returns should equity investors expect from their investments running in SIP form.
Published: 8 December 2023
3 MIN READ
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourselfDon't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same? first appeared on 29 Oct 2023 at https://arthgyaan.com