With banks raising their lending rates, home buyers will have to manage their loans effectively as they have to shell out more in equated monthly installments (EMIs). Despite no rate hikes by the Reserve Bank of India, banks facing liquidity squeeze have raised their rates. Private sector banks such as Axis Bank, Yes Bank and Kotak Mahindra Bank took the first step followed by the country’s largest lender, State Bank of India. In line with commercial banks, Housing Development and Finance Corporation Ltd too raised its lending rates between 5 to 20 basis points from April 1. A loan for under Rs 30 lakh by a female borrower will now be available at 8.40% and for others it will be 8.45%.
Home loans from Rs 30-75 lakh will be available at 8.55% for women borrowers and 8.60% for others and loans above Rs 75 lakh will be at 8.65% for women and 8.70% for others. Rates for existing borrowers have also gone up by at least 20 basis points.
While younger borrowers can cope with the increase in EMI by stretching the tenure of their loans, others may have to live with a higher EMI. Here are some options which a borrower should consider to reduce the outgo of a higher interest amount.
If one has some surplus funds that are not going to fetch better returns elsewhere, it is better to prepay part of the loan. Any one-time income such as bonus, inheritance or gain from financial markets can be used for prepayment of home loans. There is no pre-payment penalty and the amount paid brings down the principal outstanding. Borrowers who have longer tenure to service the loan, should prepay some amount periodically to reduce the interest amount rather than closing it to enjoy the tax rebates it offers. And by keeping EMIs the same as before, a borrower can complete the loan much earlier than waiting for the full tenure of the loan to get over.
Typically, in a home loan, the interest payout is much higher in the beginning of the payment schedule. As one repays the principal amount, the interest part starts reducing while the principal component increases. So it makes sense to prepay at the beginning of the loan tenure.
If you expect higher regular cashflow, then it makes sense to increase the EMI. Ideally, loan EMIs should not cross 50% of monthly income. If it is lower, increasing the EMI is an effective way to make sure the loan is repaid early. Increase in EMI can be requested at any point of time during the loan. For instance, a home loan of Rs 30 lakh for a tenure of 20 years with an interest rate of 8.7% can be repaid in 15 years if the EMI is increased by an extra sum of Rs 2,000 a month. Alternatively, for new borrowers, if the EMIs are difficult to manage initially, one can request the bank for step-up EMI option, which will enable the borrower to pay a lower EMI first and then gradually increase the EMI over the tenure of the loan.
If your lender is charging you higher interest rate, you can consider switching to a bank offering a lower rate of interest. With cut-throat competition to get retail borrowers, banks prefer to retain their good customers. If possible, negotiate for a lower interest rate with your existing bank to avoid all the paperwork required to switch your loan to another bank. However, do keep in mind that sometimes the interest rate differential can be so minimal you may end up paying more in one-time charges than saving in lower EMI.