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Cheaper Home Loan EMIs with Interest Rate Cuts

The economy is booming. Inflation is falling rapidly. There is positive news everywhere. Finally some good news for you. Banks have lowered interest rates on home loans. Does this mean cheaper home loan EMIs with interest rate cuts. Here’s a shocker. Your home loan EMI’s are the same.

Why does this happen?

Banks prefer to reduce the tenure (Time period you repay the home loan), rather than change your home loan EMI’s. Banks do not want the hassle of changing your EMI’s. Even if the interest rates come down, banks keep the home loan EMI’s constant and just reduce the tenure, you repay the home loan. If your home loan EMI’s are the same how does a fall in interest rates benefit you: If banks reduce the tenure of the home loan, your home loan EMI’s remain the same. The proportion of the EMI’s on the home loan (Interest vs Principal) changes. Home loans EMI’s have a very high interest component (Most of your repayments go towards paying interest and very little towards the principal), in the initial years. When banks reduce the tenure of the home loan, the EMI (Interest) component reduces. More of your repayments go towards paying back the principal on your home loan. This helps you as your home loan is paid off faster.

If the tenure of your home loan is long:

If your home loan has a long period of repayment (a long tenure) then most of your repayments go towards paying the interest on the home loan. This is definitely not good for you, as why would you want to pay all your money in interest. Reduction in interest rates and a lower tenure on the home loan repayment definitely helps you. If you avail a home loan with a longer tenure, then the higher interest repayments mean, you pay double the price of your home. (Borrowed amount).

See the following example: You have availed a home loan of INR 40 Lakhs .You pay an interest of 11% a year .The tenure (Time you repay your home loan), is 20 years.
Your home loan break up is as follows:

Year EMI (Year) EMI Principal(Year) EMI Interest(Year) O/S Balance
1 4,95,450 58,333 4,37,117 39,41,667
2 4,95,450 65,084 4,30,366 38,76,583
3 4,95,450 65,084 4,30,366 38,76,583
4 4,95,450 81,018 4,14,432 37,22,950
5 4,95,450 90,393 4,05,057 36,32,557
6 4,95,450 1,00,853 3,94,597 35,31,704
7 4,95,450 1,12,524 3,82,926 34,19,180
8 4,95,450 1,25,545 3,69,905 34,19,180
9 4,95,450 1,40,073 3,55,377 31,53,562
10 4,95,450 1,56,282 3,39,168 29,97,280
11 4,95,450 1,74,367 3,21,083 28,22,913
12 4,95,450 1,94,544 3,00,906 26,28,369
13 4,95,450 2,17,057 2,78,393 24,11,312
14 4,95,450 2,42,174 2,53,276 21,69,138
15 4,95,450 2,70,199 2,25,251 18,98,939
16 4,95,450 3,01,466 1,93,984 15,97,473
17 4,95,450 3,36,351 1,59,099 12,61,122
18 4,95,450 3,75,273 1,20,177 8,85,849
19 4,95,450 4,18,699 76,751 4,67,150
20 4,95,450 4,67,150 28,300 0

After paying back the EMI’s of INR 4,95,450 a year on your home loan for 20 years, you will have paid back INR 99 Lakhs for the home loan. Your house over 20 years would have appreciated (increased in value), with rising real estate rates and would be much more valuable than the home loan you have availed. So even though no Cheaper Home Loans EMIs with Interest rate cuts, you still stand to benefit.

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