THE flipside of taking a home loan with a floating interest rate is that when rates go up, you land up shelling more bucks!Expert Harsh Roongta tips off a borrower on how to manage his loan.
I took a home loan of Rs 23 lakh at an interest rate of PLR plus 1 per cent margin, that is, 7.75 per cent plus 1 per cent margin, which comes to 8.75 per cent. I took the loan from ICICI Bank on November 30, 2004. The loan tenure was 180 months and I was paying an Equated Monthly Installment (EMI) of Rs 22,987 per month, which was due on the 7th of every month. At present, the interest rate on my loan stands at 13.25 per cent, the tenure has been increased from 15 to 25 years, and the EMI amount has gone up from Rs 22,987 to Rs 25,109. For new customers, the bank is giving the same loan at a much lower rate but has not revised our interest rate. We have raised questions but the bank says this is due to an RBI ruling. What's the solution?
Option 1: Bargain for a lower rate-- If you have maintained a good repayment track record, you could get an interest rate of around 10 to 10.50 per cent from other lenders. So, you could consider shifting to another lender.
For instance, if you take a home loan of Rs 23 lakh at 10.5 per cent for a period of 20 years, your EMI will be around Rs 22,900. That way, you can go back to paying your initial EMI.
Option 2: Prepay-- You could prepay a part of the home loan if you have surplus money. Many banks do not charge a pre-payment penalty on partial prepayment. So, find out if your bank levies a penalty before you consider prepaying it.
Prepaying helps because:
-- It reduces the EMI burden since you can bring down the EMI amount.
-- You save on high interest costs on the portion of the loan that you prepay.
The flipside: When you prepay your loan, you might lose out on the Section 80 C tax break for principal and interest repaid. Hence, it can lead to a higher tax outgo.
Also, a prepayment penalty may be applicable.
Smart tip: Clear high interest loans first
However, before you prepay a home loan, remember to clear all unsecured debt such as credit card dues and personal loans. Also, do set aside some money to meet emergency expenses.
