Okay, that looks like a scam. Well, it’s a header bait. But actually, I saved myself that amount of money by making an informed decision about my home loan.
Along the process of making an informed decision on my home loan, I learnt that paying 10% rate of interest is better than paying 8.75%. It’s a pretty unique situation of mine that makes it TRUE!!
How? Let me share you my story. But before I begin, a big Thanks to BankBazaar. Because the story starts and ends with them. On BankBazaar.com, you can get instant customized quotes for loans and easily compare the total costs of the loan offers made to you.
Let me share my home loan details. I took a loan of Rs 10 lacs in August, 2004. The starting rate of interest (ROI) was 7.25%. After going to a peak ROI of 11%, it has now come down to 10.25%.
The starting EMI was just Rs 7900.00 but as the rates skyrocketed, the EMI was raised to Rs 8951.00.
I have prepaid an amount of Rs 3 lacs from time to time. As on date, the outstanding principal balance is Rs 6.20 lacs. In other words, the outstanding balance would have been Rs 9.20 lacs if I had not prepaid Rs 3 lacs.
That also means that for the last 5 years when I have paid over Rs 5 lacs in EMI, the actual Principal that has been repaid is just Rs 80,000!! (Phew, the EMI principle is so skewed in favour of lenders!)
Anyway, let’s come back to my home loan story. The banks are beginning to advertise attractive rates for new home loans with some hovering around 9% ROI. And when I checked with my own home loan ROI, they said it’s still 11% and will be reduced to 10.25% from August, 09 onwards.
It was time, I thought, to look around for a better home loan and get my loan transferred to a better rate.
I knew about BankBazaar. It’s a very powerful engine to search for the best quotes on loans. In a few minutes, I figured out a quote which looked very attractive. I was offered 8.75%.
The support functions at BankBazaar worked really well and within a few hours I got the phone call from the Bank offering 8.75%. They offered to collect the documents from me. The document required were already specified in the BankBazaar process and they added a foreclosure letter to be obtained from my existing lender.
While getting the foreclosure letter from my existing lender, I also asked for the amortization schedule for my loan. This amortization schedule tells you the portion of interest and principal in your EMI and tells you the reducing balance principal after every EMI payment. You also get to know how long it will take to repay the loan. Check this Loan Amortization Schedule
Now I saw that the total number of EMI payable is just 110. So the loan will be repaid in roughly 9 years. The total interest portion that has to be paid is Rs 3.66 lacs. (A)
On doing a similar exercise for my new loan offer @8.75% for 14 years, the total interest payout is Rs 4.75 lacs. Add the prepayment charge of 2% to be paid to the old lender and 1% processing fee to the new lender, the total interest and fee works out to Rs 4.94 lacs. (B)
The difference between these two scenarios (A & B) is Rs 1,27,535.00!!
So even though I get an offer @8.75% instead of the 10.25%, my total interest/fee cost is less than the lesser offer!
Learnings:
Surprising? Not if you figure out that the enhanced EMI is enabling me to make a part prepayment every time I pay an EMI. So even though I had taken a loan for 20 years, the enhanced EMI is helping me prepay the loan in just 14 years!
Another learning is that it is important to consider the repayment term of your loan. If I go in for a loan @8.75% for 11 years, the difference in interest/fee would be negligible. For less than 11 years, I will make some savings by transferring the loan.
Check out BankBazaar’s powerful Refinance calculator
Do you have anything to share about your home loan? Or do you have any questions? The comments section is awaiting your response.
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Interesting! I did a similar calculation for my mortgage and I realized that it makes little sense to refinance after a while – mainly because your loan resets and your principal repayment reduces dramatically. Of course, the banks make money through refinancing so they will try to focus the attention on the interest rate; but people should look at the total interest they will have to pay over the life of the loan. When people evaluate their options that way, the picture can look very different!!
How come http://www.bankbazaar.com is responsible for the saving when they don’t provide such calculations on there website??
On the contrary Bank Bazaar is the one which forwarded your documents without checking this calculation. Virtually banbazzar had pushed you more towards the loss of the said amount where as thanks to your brain that you saved it inspite of being lured by bankbazaar proposal.
Calculation is true and numerous such calculations are available on other competitive websites. Don’t restrict your vision to only one website , explore the whole possibility by visiting other financial websites before making a sound decision.
BankBazaar is focused on providing the best quotes. So I don’t blame them. Plus, they have a powerful refinance calculator on their site too. Check http://www.bankbazaar.com/finance-tools/refinance-calculator.html
As the period increases, the interest component you pay increases in case of EMI. So, its always better to pre-pay more (as much as you can) during the initial stages of your loan.
Also, when you are comparing two banks with different interest rates for re-financing, probably, I would think, you would complete the loan in the same tenure.
If that’s the case, still, the 8.75% leads the race as per your blog itself. If the difference between the current lending rate and the best market rate isn’t much, then the pre-payment and processing charges will leave you to stay with the same lender.
But, in this case, Why don’t you leave to the new lender who is giving @8.75% for 9 years tenure? I hope, by this way, you will be benefitted?
@Manickkam You’re right and I have said that in the post too. But often, the attractive offer is an invitation rate. They have the right to change that after 3-6 months.
My own reasoning was that if the benefits are not that large, why take all the effort. Moreover the interest benefit is over the period of next 9 years, while the prepayment/ processing fee is payable upfront. It might be interesting to see the present value of the interest benefits over the next 9 years. (which obviously would be much less than the absolute value!)
I have been told, as a rough calculation, it is not wise to change the loan if you have already paid half the EMIs, because you have already paid the major portion of the overall interest.
So as a rough guide, during the first half (inital stages) of the loan tenure, prepay as much as you can and during the second half (later stages), don’t change the loan, don’t even repay it. At this stage it is better to invest / save any extra amount than to prepay it.
Sorry, in the last line it should be ‘prepay’ rather than ‘repay’. You always have to repay everything.
@Sachin That would be a reasonable thumb rule. Thanks.
But with the new direct tax code, we may go for the full prepayment (if possible) if the tax benefits are no longer available.
I think you are essentially talking about time value (whose analysis is missing) of money as well as opportunity cost. Correct me if I am wrong.
@Parag You have raised a very valid angle to the case. The benefits would accrue over a period of time and their present value would be different from the total interest cost referred in the post. Thanks.
Hello Ranjan,
I don’t agree with you at all. You seem to be an agent from some private bank.
Refinance always helps in case there is a significant interest difference.
-Abhijeet
@abhijeet d It’s okay not to agree with me. I find your comment very amusing, though!
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Hi, I am not sure if this is the correct forum to ask this question.
I have o/s loan of Rs 7.5 lacs and EMI arounf Rs 11,000. This year I got tax saving to the extent of Rs 88,000 towards housing loan intrest. I am 30% bracket in paying incometax. Now I have Rs 7.5 lacs in Fixed Deposit and paying tax on the intrest. Do you suggest to clear the loan or continue to hold loan?
In my opinion, it’s always better to be debt free, despite the tax benefits of the loan. In any case, you also need to compare your effective rate of interest on your loan and the FD. The effective rate is the net rate, minus the tax implications.
Yo. foreclosures are bad but are good to buy. Just wish they are gonna do something about the financial system.
I had taken an HSBC SMART Home Loan, where you can deposit your excess funds, for example, the rent I receive is deposited in this account. The additional deposit goes to reduce my interest rate, but no interest is earned on the credit balance. The effective interest rate on the home loan is low compared to the current loan rate. However note this is advisable only for individuals who have excess funds, such as rental income.
I have taken home loan for Rs 21lacs. The break up is as follows
1) 13lacs -Rs 3lacs @6% and Rs 10 lacs @9.30
2) 4.5lacs @9.25
the period is for 15 years. For 13lac the company will recover the principal for 1st 10 year and recover interest for the last 5 years.
For 4.50 lacs the company is recovering interest first . Question which loan i have to repay sooner or is it advisable to have this loan because i am getting tax rebate?.
Kindly advice
@Anand It adds up to 17.5 lacs, not 21 lacs. If the interest is fixed, it doesn’t make much difference. But you can start with repaying the small loans first.
It’s always a better idea to get rid of your liabilities rather than have them to get tax benefits. But this is my personal view.
Interesting article, thanks for sharing. A loan calculator would be great.
I’m also on the look out for a Home Loan and I just wanted to know is there any website wherein I can get to know which Bank is offering the lowest rate. Bank Bazaar Team calls you back to inform you about the same but I’m looking for a website on which the Current Rate of interest would be written online.
Not sure if prepaying 3 lakhs of the money (at an interest rate of 8.75%) was such a good move. If the same money was invested in an equity diversified fund, it would have yielded 12-15%. Basically you bought peace of mind, since you wanted to get rid of the loan – but the opportunity cost of doing so .. is not saving you that much money
With the Growing inflation, I am not sure if it is a good idea to pay off your home loan as soon as possible. If you have good debt like home loan, Just Make sure your interest rates are fixed.
Most people know about only one kind of debt. But there are two kinds of debt – Good Debt and Bad Debt. When you borrow money to purchase a bigger TV, to buy a car, to go on vacations or to buy any other item that depreciates in value with each passing year, you have a Bad Debt.
Instead if you borrow money to buy a home or other rental property, it is a good debt. Let’s say you take a home loan to buy a home that costs 10 lacks and your monthly mortgage installment is 10.000 Rs. With the growing inflation the price value of your home will rise at least 10% per year.
Generally the home prices rise in direct relation to the inflation. If inflation is 10%, the home prices rise at least 10%. The good news is your income also rises 10% with the inflation and sooner 10.000 Rs. FIXED monthly mortgage installment will become cheaper. So it is not good idea to pay-off your mortgage as soon as possible instead you should get a Fixed-interest-rate home loan for at least 20 years.
With the 10% annual inflation, 10.000 Rs will become like 5.000 of today in next 7 year and your income will be double.
What do you think about my view?