₹40 lakh home loan: How much can you save if interest rate falls from 10% to 9% over 10, 20, 30 years?
If you are availing a fresh home loan, even a minor reduction in the applicable interest rates can alter the repayment trajectory of your loan- it can go a long way towards helping you save money, even if the rates are reduced only slightly.
This is because even a minor one-percentage-point reduction in home loan interest rates can reduce a borrower’s interest costs over different repayment periods.
For someone taking a ₹40 lakh home loan, reducing the annual interest rate from 10% to 9% could save them approximately ₹2.63 lakh over 10 years, ₹6.27 lakh over 20 years and ₹10.50 lakh over 30 years.
Such a saving also translates into lower equated monthly instalments (EMIs), thus making the home loan more affordable.
Here is a breakdown of the calculations in both cases (9% and 10%), assuming the interest rate remains unchanged throughout the loan term.
The home loan EMI is calculated using the standard monthly reducing-balance formula:
Where:
- P = Principal loan amount ( ₹40,00,000)
- r = Monthly interest rate (annual interest rate divided by 12)
- n = total number of monthly instalments (loan tenure in years multiplied by 12)
This means, for a ₹40 lakh loan at 10% annual interest over 20 years, the monthly interest rate is 10% ÷ 12, and the number of instalments is 240. Applying the formula gives an EMI of approximately ₹38,601.
|
10 years |
20 years |
30 years |
|
|---|---|---|---|
| Loan amount | ₹40 lakh | ₹40 lakh | ₹40 lakh |
| EMI at 10% | ₹52,860 | ₹38,601 | ₹35,103 |
| EMI at 9% | ₹50,670 | ₹35,989 | ₹32,185 |
| Monthly EMI savings | ₹2,190 | ₹2,612 | ₹2,918 |
| Total interest at 10% | ₹23.43 lakh | ₹52.64 lakh | ₹86.37 lakh |
| Total interest at 9% | ₹20.80 lakh | ₹46.37 lakh | ₹75.87 lakh |
| Total interest saved | ₹2.63 lakh | ₹6.27 lakh | ₹10.50 lakh |
Note: Figures are approximate and calculated using unrounded EMI values. The calculations assume a constant interest rate, monthly repayments and no additional fees or prepayments.
In this case, the longer the repayment period, the greater the reduction in total interest when the rate falls by one percentage point.
This means that a borrower with a 10-year loan saves approximately ₹2.63 lakh, whereas someone with a 20-year loan saves ₹6.27 lakh. Over 30 years, the interest savings have increased to approximately ₹10.50 lakh, which is a significant amount (approximately 25% of the total loan) on a ₹40 lakh total home loan.
However, a longer tenure at the same interest rate increases the total interest burden. This is because, even at 9%, a ₹40 lakh loan over 30 years attracts approximately ₹75.87 lakh in interest costs, compared with ₹20.80 lakh over 10 years.
Borrowers should hence weigh the benefit of a lower EMI against the total cost of borrowing. If their budget permits, choosing a shorter tenure or maintaining the existing EMI after an interest rate reduction or at the lowest possible rates can reduce overall costs.
Before proceeding with a fresh home loan, borrowers should also compare important factors such as:
- Processing fees
- Applicable penalties in case of default or missed payments
- Legal charges and ramifications (if any) and other applicable costs
- Expected savings in different scenarios
- Their current financial reality and the potential to meet repayments
Hence, on a ₹40 lakh home loan, a rate reduction from 10% to 9% can help a borrower save approximately ₹2.63 lakh over 10 years, ₹6.27 lakh over 20 years and ₹10.50 lakh over 30 years.
The actual savings for an existing borrower in a specific home loan case will depend on the outstanding principal, applicable tenure and how the lending institution adjusts the EMI or repayment period.
Common calculation tools, such as the ICICI Bank Home loan calculator, can be used to calculate how home loan repayments vary under different interest rate scenarios and to align the repayment plan accordingly.
Shivam Shukla
Shivam writes on personal finance, equity markets, and mutual funds. He has previously contributed to several leading publications, including Moneycontrol. He can be reached at shivam.shukla@htdigital.in
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HomeMoneyPersonal Finance ₹40 lakh home loan: How much can you save if interest rate falls from 10% to 9% over 10, 20, 30 years?
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