Most banks have increased the interest rate for home loan for both new and existing borrowers.
Most banks have increased the interest rate for home loan for both new and existing borrowers. As equated monthly installment (EMI) for a home loan means a substantial amount of money to be paid every month for a long period of up to 25 years, a hike in the interest rate will put additional burden on the borrower.
Existing borrowers can reduce the burden by using savings to pay off the loan, wholly or partially. In a home loan, the interest portion is front-loaded or is the most in the first nine years of the loan. Here are some ways to reduce the home loan burden in the long run.
Ideally, a borrower should start prepaying some amount from the first year of the loan. Prepaying later does not save much in terms of interest payment. Banks do not charge any pre-payment penalty on floating loan and the minimum amount of prepayment has to at least two month’s of EMI. Banks will accept prepayment if it is done from own funds and as a proof will ask for six month’s bank statement.
However, one should prepay the loan after keeping sufficient emergency funds. If not done, then in case of any emergency in the family, the person may have to take a personal loan, which charges a much higher rate than a home loan. Also, if the borrower finds an alternative investment option where the rate of return is more than the home loan interest rate, then it is better to invest and earn higher returns.
Step up EMI
When lenders hike the interest rate, borrowers should not extend the tenure of the loan; instead, they should increase the EMI which will help reduce the total interest payout in the long run. Ideally, the EMI should be less than 50% of one’s monthly income. If the EMI is much lower than this, increasing EMI is an effective way to make sure the loan is paid out early. Increase in EMI can be requested at any point of time during the loan tenure and there are no charges for such a request. The borrower will have to give a fresh ECS mandate to the bank for the new EMI.
For a salaried employee, stepping up EMI helps as the borrower progresses in his career, promotions and higher pay packages which will result in higher disposable income. So, instead of discretionary spending on a new mobile or a swanky car, use the annual increments to increase the EMI amount and prepay the loan sooner.
Balance transfer of loan
If the borrower thinks that the bank is charging him more, look out for another lender who will offer you a lower rate and refinance the existing loan. This is a better option as it doesn’t impact your savings yet helps reduce the total interest paid over the loan tenure. Balance transfer of loan too will be beneficial to a borrower, if done in the early stages. In fact, getting a 0.5% to 1% reduction in home loan interest rates will save around Rs 5 lakh for the entire loan period.
However, do remember that sometimes the interest rate differential can be so low that the borrower may end up paying more at one-time charges than saving in lower EMI. Look out for various charges such as the processing fee, legal charges and the valuation cost for balance transfer. Calculate all of these charges to evaluate whether the balance transfer of the home loan you are considering will result in a net gain or a net loss.
You can also negotiate with your existing bank to reduce the rate so banks will find it profitable to deal with an existing borrower who has not defaulted on payments. In case of balance transfer, the current bank will give a statement showing the borrower’s outstanding principle. Once the new bank approves the balance transfer, it will issue a cheque to the current bank and take all mortgage papers. Most banks aggressively look at balance transfer to acquire new customers.