Part payment can tame rising EMIs

MUMBAI: House owners who have opted for floating rate loans to fund their dream homes are having sleepless nights. Thanks to the Reserve Bank of India's steep hike in policy rates and the resultant increase in home loan interest rates by housing finance companies and banks, many of them have seen their equated monthly instalments (EMIs) balloon considerably.Many of them are also anxious about the future course of interest rates, as most bankers aver that the banking regulator hasn't finished with monetary tightening yet - they believe the central bank may hike policy rates further by another 50-75 basis points (100 basis points = 1%) during the financial year.
"It is true that home loan EMIs have gone up considerably. Those who have opted for 8% teaser loans are potentially paying 11%," says Adhil Shetty, founder and CEO, Bankbazaar, a financial consumer portal. In 2009, leading lenders such as the State Bank of India (SBI), ICICI Bank and HDFC, among others, had introduced the so-called teaser home loans, where the interest rates were kept artificially lower-mostly 8.0-8.5%-than the market rate in the first three years. The interest rates prevailing in the market-currently at around 10.5-11%-would apply to these loans from the fourth year onwards. According to experts, home loan interest rates have gone up by 3-5%, with existing customers paying anywhere between 12-15%.
What makes matters worse is that these home loan customers don't have many options to wriggle out of the situation. "Unlike in the past, one can't advise them to shift to a lower interest rate with another bank because that option doesn't exist anymore," says Adhil Shetty. "It is not worth the effort to shift to another bank which will offer you loans at half a percent or one percent lower rate. Unless you are getting the loan at 2% lower rate, you won't save much," says Suresh Sadagopan, chief financial planner, Ladder7 Financial Advisors. "Also, the difference in the rates between the new bank and the old bank is unlikely to remain the same forever. Sooner or later the gap may narrow," he adds.
"A customer has two options before him/her if the EMI has gone up considerably and finds it difficult to service it. One, approach the bank and extend the term of the loan so that the EMI remains with manageable limit. Two, liquidate investments in fixed deposit or mutual funds and prepay a part of the loan so that the EMI comes back to reasonable level," says Shetty. Sadagopan also believes that customers who are paying above 12% should consider making a part-payment to bring the EMI to reasonable levels.
"You should continue with some of your investments, but you should consider using the surplus cash you may have or maturity proceedings from FD or insurance policy for the purpose. You should remember that there is no point in investing in an FD that will earn you 9% pre-tax return when you are paying an interest rate of 12% or more on your home loan," he says.