How to manage home loan in current rate hike scenario
With RBI announcing a hike in repo rate and several banks increasing their MCLR, there is a growing concern among borrowers regarding a rise in the EMIs. While there might not be an immediate rise in the existing rates, it is worthwhile for the loan borrowers to consider apt measures to save money.
Increase EMI, retain tenure: Borrowers can consider tweaking their approach for mitigating the impact of increasing rates. By default, most of the lenders extend their repayment tenure instead of increasing the EMI. Even though you do not feel any immediate impact, the fact is that your interest burden mounts up as tenure increases. It is advisable to increase the EMI and not change the tenure significantly. This particular approach will work in favor of you if you act in this manner.
Consider your home loan amount is Rs 60 lakh, ROI is 8.5 per cent, original tenure is 20 years, monthly EMI is Rs.52, 069.39, and total payable is 64.96 lakh. If the home loan rate is hiked where the new home loan rate is 9 per cent and new tenure is 21 years, your total loan payable will be Rs.73.74 lakh. To counter this, if you increase your EMI amount, from Rs.52, 069.39 to Rs.53, 983, your extra payment per month will be Rs.1913.61, your totalotal payable will be Rs.69.56 lakh, making you save Rs.4.18 lakh.
Switch lender for a lower rate:
While transferring the home loan to another lender, who is offering you lower rate of interest, can result in savings, predominantly because the banks are interdicted from levying foreclosure charges on floating rate loans, it is also dependent on your balance repayment tenure.
Older borrowers have the option to explore the option even when the difference is narrower, after a cost-benefit analysis. When there is a gap of more than 0.25 per cent between the current lender's pricing and competing lender, it is recommended to consider switching. However, you must consider negotiating with the present lender first. If this fails, you might consider refinancing.
For example, your home loan amount is Rs.60 lakh, tenure is 20 years, and existing ROI is 8.75 per cent; this means the monthly EMI will be Rs.53, 022 and the total payable will be Rs 67.25 lakh. If the new lender's ROI is 8.5 per cent, the monthly EMI will be Rs 52, 069 while the total payable will be Rs 64.96 lakh, along with ancillary charges and processing fees of around Rs.15000. The balance transfer, hence, will save you around Rs 2, 14,000.
On the other hand, if you are closer to the end of your loan tenure, it might not make sense to go through the inconvenience, as savings might not justify the balance transfer. The factor in ancillary charges and switch over will fail the cost-benefit analysis.
Part Prepayment:
Part prepayment is another option to lower the interest burden. You may pay off part of loan amount by paying a lumpsum amount on the loan, instead of say, making an investment in low yielding schemes.
For instance, let’s assume that your home loan amount is 60 lakh, ROI is 8.5 per cent, and tenure is 24 years. Your monthly EMI in this case, will be around Rs.48, 904.94 while the interest payable will be 80.84 lakh. However, in the 7th month if you prepay an amount of Rs.3 lakh, then your revised interest payable will be 65.08 lakh reducing the tenure by 4 years, helping you save an interest of Rs.15.76 lakh.
However, Keep in mind that savings through balance transfer is likely to be more than returns on these investments.
By Naveen Kukreja – CEO and Co-founder, Paisabazaar.com