If you’ve taken out a home loan, it’s crucial to understand a recent rule from the Reserve Bank of India (RBI). This regulation has the potential to help you save a remarkable Rs 33 lakh on a Rs 50 lakh loan. Let’s break down the calculation.
The Impact of RBI’s New Rule
Ever since banks simplified the home loan process, achieving the dream of owning a home has become more attainable for countless individuals. If you’re one of those who have secured a home loan, it’s essential to acquaint yourself with RBI’s latest rule changes. These regulations can enable you to save a substantial sum of Rs 33 lakh on a home loan of up to Rs 50 lakh.
The Challenge of Rising Interest Rates
Over the past year, the Reserve Bank of India has steadily increased the repo rate, maintaining it at 6.5 percent for an extended period. This has primarily affected those with home loans, leading to an increase in their EMI burden. To provide relief, banks often refrain from raising the EMI on home loans and instead opt to extend the loan repayment duration. However, this decision can have long-term repercussions.
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Why Lower EMIs May Not Be Beneficial
Banks usually avoid increasing your EMI but choose to extend the loan tenure. This means that you end up paying interest for a more extended period. While most people take out a home loan with a 20-year tenure, some extend it to 30 or even 40 years to maintain lower EMIs.
For instance, if you take a 40-year home loan with a standard interest rate of 7 percent, the EMI per lakh of the loan amounts to around Rs 600. However, if you opt to convert this loan to a 30-year tenure, the EMI will increase slightly to Rs 665 per lakh, but your loan tenure will decrease by a significant 10 years.
Understanding RBI’s Recent Directive
In response to the challenges faced by borrowers, RBI introduced a new directive effective from August 18, 2023. This directive has the potential to save you up to Rs 33 lakh in interest on a loan amount of Rs 50 lakh. RBI has instructed banks not to unilaterally extend loan tenures to avoid EMI increases. Instead, they must present both options to customers: the choice to increase the EMI or extend the tenure.
Furthermore, banks are now obligated to inform customers about the financial implications of potential EMI increases or tenure extensions due to rising interest rates. They must also provide the option to switch the loan to a fixed interest rate and disclose any associated conversion charges in advance.
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Calculating the Rs 33 Lakh Savings
Let’s calculate how you can save Rs 33 lakh when repaying a Rs 50 lakh loan with a 7 percent interest rate over 20 years.
- The monthly EMI for a Rs 50 lakh loan over 20 years is Rs 38,765, resulting in total interest payments of Rs 43.04 lakh.
- After paying EMI for 3 years, your remaining loan amount will be Rs 46.16 lakh, with Rs 10.12 lakh paid in interest.
- If the interest rate increases to 9.25 percent after 3 years and you opt to increase the EMI for the remaining 17 years, your total interest payment will amount to Rs 45.58 lakh.
- Combining the interest paid in the first 3 years and the subsequent 17 years, the total interest paid over 20 years is Rs 55.7 lakh.
However, if you extend the loan tenure without increasing the EMI, you’ll have to pay a total interest of Rs 88.52 lakh, which is Rs 33 lakh more than the interest accrued when choosing to raise the EMI. This straightforward yet strategic decision can lead to substantial savings on your home loan.
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