A Prepayment can Save you from Rising EMI Burden

Mumbai: The Indian middle class is slowly realising the implications of opting for floating interest rates on their home loans.

Persistent hikes in interest rates in the last one year is threatening to upset monthly budgets of many middle class families.

Those in their late forties are getting calls from their housing finance company, asking them to pay a higher equated monthly instalment (EMI).

Their younger counterparts, on the other hand, are learning that the tenure of their loans has gone up by a few years.

“People who have opted for a floating rate are really worried. I have clients who are forced to cut down their expenses and investments because their EMIs have gone up considerably in the last one year,” says a financial advisor. “I have asked some of them to liquidate their fixed deposit and make a prepayment.”

Harsh Roongta, too advises a prepayment to keep the EMI and tenure unchanged. “For every 1% hike in interest rate, roughly you have to pay around Rs 7,000 rupees for a Rs 1 lakh loan with a 20-year tenure,” he says.

For instance, if you have a Rs 10 lakh loan with a tenure of 20 years, you can make a one-time prepayment of around Rs 70,000 to ensure that your original EMI remains constant.

Also, if you have age on your side, you can ask the bank to increase the term of your loan. “If the customer doesn’t have the means to pay a higher EMI, we increase the tenure of the loan. It becomes a problem only if the tenure will extend to a period after retirement. In such cases, we have no choice but to increase the EMI,” says an official with a housing finance company.

As for prospective home buyers, you should consider postponing the purchase for the next six months. According to financial experts, interest rates are likely to go up further, dragging property prices down.

“The RBI (Reserve Bank of India) doesn’t seem like done with the policy rate hike. It may hold rates only after it achieves its inflation target. If rates goes up further, it will definitely slow down demand,” says a senior banker.

“If one can afford to wait, it is better to postpone the purchase by six months. Especially, those who are buying the property for investment. However, if you are buying a place to stay, you can still go ahead. Over a long period, the price would even out,” says Roongta.

Financial advisors also have another solution for those with a tight budget. “If you have an insurance policy, national savings certificates, shares or mutual fund units, you can pledge them to get an overdraft facility. You can use the money to make a prepayment or pay EMI,” says Roongta.

Another way out would be to borrow more. “It is not a preferred route. But if you don’t have any other way out, you can ask the bank to offer you a top-up loan to make a prepayment,” says a financial advisor

(Courtesy: TOI)