Make your home-loan EMIs manageable

With the RBI not ruling out further rate hikes,EMI burden is set to rise further.

The Reserve Bank of Indias battle against inflation seems to be aimed at reducing consumption and demand through higher interest rates. The logic here is that once demand goes down,prices would start correcting and inflation be under control. However,despite last ten hikes,the spectre of inflation remains. And the direct fall-out of the rate hikes is the increasing burden on home-loan borrowers.

The current rate hike comes at a time when borrowers are already reeling under the pressure of increasing EMIs equated monthly installments. Moreover,it is widely expected that the RBI may hike rates further. Since home loan is the biggest single cash outflow in the Indian households,it is important for a borrower to understand how a home loan works and the ways to reduce the burden.

Principal and interest component

In the initial few years,the interest is the main component in the EMI around 80 to 85 per cent and rest is the principal. When the lender increases interest rates,the tenure of the loan is increased without disturbing the EMI amount. Ideally,a lender should ask a borrower before increasing the tenure but in practice most lenders just send an intimation letter without giving an opportunity to the borrower to make a pre-payment or increase the EMI to offset the increase in burden. Vinay Singh,a Mumbai-based real estate expert,advises,As soon as you get the letter from the lender on increase in interest rate,sit with their executive and do the calculations. You would not want your tenure to be increased from 240 months to 400 months. There is a limit,however,to which a lender can increase a borrowers tenure. Once reaching that limit,the lender demands that the borrower make a part pre-payment or increase the EMI amount. Experts advise home loan borrowers to prepare themselves financially and mentally for more rate hikes in the near future.

Part prepayment

This is the time to liquidate investments such as fixed deposits to make partial pre-payment. An FD would give you a return of over 7 per cent post tax,while on a home loan you would be paying interest at around 11.5 per cent. Some part pre-payment would significantly take the pressure off. Along with the FD,you may also look at liquidating some part of your mutual fund or insurance investments in consultation with your financial advisor. If you are locked into an investment or do not have enough bank savings to make the pre-payment,you may look at extending the tenure of your loan.

The latest increase is likely to cause more pain to home loan clients. The increase in rate is likely to compel clients to postpone or reconsider their proposition of investing in new homes. As for existing clients,there is limited or no flexibility available on adjusting the loan tenure to accommodate the increased rates. It is anticipated that the latest amendments in pricing will have an impact on the EMIs more than that on the loan tenure, says Vipul Patel,Director,Home Loan Advisors,an independent mortgage advisory firm.

Loan refinancing

Loan refinancing,put simply is taking a new loan to repay an old one. Avoid shifting your home loan to some other lender in these times as there is not much difference in the lending rates among various lenders. Only if you get a differential of 2 per cent or more should you look at balance transfer of loan, says financial advisor Suresh Sadagopan.

Balance transfer to other lenders has its own cost implications and its better to do all the calculations while exploring such options. Through various online tools available on the internet,you may calculate the net outflow on taking a refinance decision. Though you may be able to reduce your EMI but if the tenure increases substantially,it will result in high net outflow making it a bad decision. It depends on your current ability to service the loan. If you feel that the cash saved every month on a lesser EMI can help you lead a better life,then it could make sense. However,if the refinance is going to result in a net outflow of more than 15 per cent of the current loan,it is better to stay away from it, says Adhil Shetty,CEO,Bankbazaar.com.

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There have been instances when NBFCs increased the home loan rates which were significantly above the then prevailing market rates. In case your home loan rate is 2 per cent above the market rates,you must renegotiate the rates with the lender and if negotiations fail,refinancing can be a good option, suggests Patel.

With further rate hikes expected,you would do well to do your calculations and take a hard look at your liquid assets that can come handy in case your home loan EMI becomes unmanageable. Do not forget to keep an eye on the increase in the tenure by the lender. Doing a little math at this stage would save you from sudden shock later.

ritukant.ojhaexpressindia.com

KEY TAKEAWAYS

EMI burden is set to increase

Discuss payment schedule with lender

Use FD/MFs to make part payments

Exercise refinancing option if difference is at least 2 per cent