When Bangalore-based Rahul and Nisha Agnihotri took a joint home loan of Rs 50 lakh to buy an apartment in 2009, they thought they only had the EMI of Rs 43,350 to worry about. They were mistaken. Last fortnight, Rahul got a call from his lender. "Earlier, whenever the rates were hiked, our loan tenure was extended. Now our bank says this is no longer possible because the tenure would extend beyond my retirement age," says Rahul, the 32-year-old software professional. "We have to either increase the EMI amount to Rs 48,000 or make a prepayment of Rs 3.5 lakh."
Home loan rates have been hiked by almost 250 basis points in the past one year. The rise, the steepest for housing finance in one year, has upset the budgets of millions of floating rate borrowers.
Whatever your situation, there is a way out of this squeeze. So if you are wondering how to cope with the rise in rates, here are few strategies that can lessen your home loan burden. The suitability of each option depends on the type of home loan, its balance term and the loan amount. Choose the one that fits your situation the best.
STRATEGY I
Make prepayments
Prepaying the loan is the best way to bring down your loan burden. This can be done by diverting money that is flowing into investments or liquidating existing assets to raise funds. Gurgaon-based Ritu and Deepak Tyagi are servicing two home loans, but have managed to bring down both the tenures with an aggressive prepayment plan. "We prepay the loan as and when we have surplus cash," says Ritu. In the past four years, the Tyagis have prepaid nearly Rs 8 lakh of their home loan.
The Tyagis even dipped into their long-term savings to reduce the loan burden. When Ritu changed jobs, she withdrew her PF balance of Rs 2.5 lakh to prepay the loan. "I know this is not advisable because the PF is meant for another financial goal, but there's no point in investing the money to earn 8.5% when you have an outstanding home loan at 12% per annum," she says.
Of course, not everyone has this option. If someone had surplus money, why would he take a home loan in the first place? So it's unlikely that a borrower will suddenly discover a large bank balance with which he can prepay his home loan or be able to channelise a big sum earmarked for investments for this purpose.
What they can do, however, is liquidate some low-yield assets to bring down the outstanding loan. Break that fixed deposit you started two years ago. Redeem the debt fund investments you made last year. Unfortunately for many borrowers, the rise in interest rates coincides with a steep decline in stock markets, leaving them with limited options when it comes to equity-based investments. They can either liquidate their investments at low prices or look for alternative sources of funds to prepay their loans.
STRATEGY II
Increase the EMI amount
This is perhaps the most feasible option for the average home loan borrower. A higher EMI absorbs the impact of the rise in rates without touching the tenure. Even if there is no rate hike, this should be the way to go for long-term borrowers. After all, as your income goes up, so does your repayment capacity. Mumbai-based Gaurav and Sonal Gandhi (see picture) increased their home loan EMI from Rs 26,000 to Rs 30,000 after their income rose in 2010. "We were confident that we would be able to service a bigger EMI," says Gaurav. This brought down the residual tenure of their loan from 19 to 11 years.
"Increasing the EMI is the best way to tackle the hike in home loan rates," says Vipul Patel, director of Home Loan Advisors, an independent home loan consultancy. "When the interest rate cycle turns and rates drop, you stand to gain big time."
Discuss with the lender how much more you need to shell out to bring down your loan tenure to a manageable duration. However, make sure not to commit to an EMI you won't be able to sustain. Financial planners say that debt repayments should not exceed 30-35% of your total income. "If a person is confident that his income will rise in the coming years, he should opt for a higher EMI," says Patel.
If you have given post-dated cheques to the lender, they will need to be replaced with cheques of the higher EMI. However, if you have an ECS mandate, a simple instruction to your bank will be enough.
STRATEGY III
Extend the loan tenure
This is the easiest, but the worst, way out for the borrower. "Extending the loan tenure is a short-term convenience that can lead to long-term pain," warns Patel. This is because extending the loan increases the interest burden on the borrower. The interest on a 15-year loan of Rs 50 lakh at 10% adds up to Rs 47.25 lakh. Extend the tenure to 25 years and the interest shoots up to Rs 85.6 lakh. In 30 years, it touches Rs 1.1 crore-more than double the principal amount.
Besides, this is a limited option. As in the case of the Agnihotris, the loan tenure cannot be extended endlessly. Lenders don't want the liability to extend beyond the retirement of the borrower.
This option suits a borrower whose loan is set to finish in less than 5-6 years. A slight 50-75 basis point increase in the home loan rate will not increase the tenure too much. A couple of extra EMIs will take care of the increase in interest rates.
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