We live in a high interest rate regime, thanks to 13 rate increases by RBI in the past 18 months. What does it mean to an average home loan borrower? FC Build explores
The scenario: On an average, interest rates on home loans have gone up by 250-300 basis points (2.5-3 per cent) over the last 18 months.
According to a recent estimate of rating agency Crisil, borrowers are forced to shell out Rs 6,000 crore annually because of the total rate hikes over the past year and a half. There has been a 15 per cent increase in the equated monthly instalments (EMIs) for most borrowers.
Now, the question is: Should you pre-pay part of your loan if you can, or allow the bank to increase EMI, or increase the loan tenure, or switch to another bank.
The golden rule of thumb still exists: Do not over stretch your limits. To put it in the words of MD Mallya, chairman and managing director of Bank of Baroda, “A borrower should first check if he has the disposable surplus to pay the EMIs.”
But the irony today is: If you are approaching the banks for a home loan as a new borrower, your interest rate will be lower than those who already have taken a loan out. While existing home loan borrowers are seeing their EMI rise with rising interest rates, new borrowers are getting home loans at a lower interest rate. The average rate of interest charged to existing customers is between 11per cent and11.5 per cent, while new home loan borrowers are entering at an interest rate of 10.5-10.75 per cent. Of course, Mallya advises that existing borrowers who have the means to prepay loans should consider that option first.
And now the good news: According to analysts and banking officials, banks may not raise home rates again this time as rates have almost peaked. The RBI has already indicated that the latest hike was probably the last one in this cycle.
Negotiate hard
If you are already a borrower, renegotiate. Some banks may agree to reduce interest rates if they see that high interest charges are likely to affect your paying capacity. If you are a new customer, bargain hard. Although some like Shanta Rangaswamy, retail head of Canara Bank, say negotiation might not lead anywhere, as most public sector banks have already lowered their interest rates for new customers by 0.25 per cent to 0.5 per cent, most say if you negotiate hard, you might find a way out.
“With the RBI working on waiving prepayment penalty, banks may agree to lower the interest rate as otherwise customers would move to other lenders. So banks will refinance their own book to retain their customers,” says Vipul Patel, director of Home Loan Advisors.
According to a senior banker with a leading private bank, “If a borrower has a good repayment track record and if the EMI is not within manageable limit, then we may consider the case and extend the tenure. But this can be done only once. The borrower will have to pay a one-time rescheduling fee which would be 25-50 basis points if the interest rate reduction is between 50-75 basis points. Also, banks have a waiting period for passing on the benefit of the revised (reduced) interest rate which could be quarter or half year depending on the loan contract. The borrower would get the benefit only till the next rate hike.”
Prepay your loan
If you have money stashed for future, now perhaps is the time to air it. Especially if your treasure is not giving good returns or bonuses. You should prepay if you can. Several banks allow a home loan borrower to partially prepay up to a certain limit without any penalty.
Although, do take into consideration that if you decide to prepay the full outstanding loan amount, you are likely to incur the highest prepayment charge. Your task is to find out the specific prepayment penalty levied at different stages of the tenure of the loan as banks have different charges for prepayment at different timelines.
Banks charge 1.5 per cent to 4 per cent of the loan outstanding as prepayment charges from home loan customers. Also, the pre-payment penalty charges differ if you prepay using your money or you take another loan from another bank. For instance, banks such as SBI and Canara Bank do not charge prepayment penalty if you pay with your own money.
The RBI is already contemplating waiving prepayment penalty and is awaiting the comments from Indian Banks Association on its proposal to do away with prepayment penalty on floating rate home loans. Recently, the Banking Ombudsmen Conference suggested that banks should not impose prepayment charges on loans with floating rate of interest. (More than 95 per cent of the borrowers have taken home loans on floating rate basis.)
In a circular a couple of weeks ago, NHB told housing finance companies (HFCs) that they could charge prepayment penalty if the loan, at fixed rate interest, was pre-closed out of one’s own sources.
“Prepaying the home loan will not only bring down the outstanding loan amount but will also help you close the loan much earlier and save big. In case the borrower did not have additional funds then he should opt for a higher EMI and keep the loan tenure constant,” says Jaideep Lunial, a certified financial planner.
EMI or tenure
If you could manage the increase in EMI, this is still a much better option than increasing loan tenure. Although staggering the burden through a longer tenure may give temporary relief, it is an expensive option. In fact, according to Lunial it is the “worst option”. So consider it only when you absolutely cannot increase your EMI amount.
Switch to another lender
Ask around and see if you could benefit by switching your bank. “The borrower needs to see the differential rates and the cost benefits. If the saving is substantial, then the borrower should take the pain of shifting his loan to another bank,” says Patel.
Be wary of fixed rate
Banks such as ICICI, Housing Development Finance Corporation (HDFC), LIC Housing Finance and Axis Bank have launched fixed interest rate home loans. They claim that fixed rate loans would give customers the certainty on the EMI they need to pay for the entire loan tenure. But these loans are mostly a mix of fixed and floating interest rates. For a specific period, say around 1-5 years, the interest rates are fixed after which they are converted to floating rate. Check the fine print of your fixed loans.
According to Harsh Roongta, CEO of apnapaisa.com, “In fact, in longer fixed rate options, the borrower has to pay a premium over the applicable floating rate. This is, therefore, much more akin to the “fixed rate” loans being offered by a limited number of public sector banks where the loan reverts to the regular floating rate loan after the “fixed rate” period is over.”
According to Patel, rates have peaked, and therefore, banks are offering these products. "Interest rates are in the range of 10.75 per cent to 11.25 per cent so the upward scope is 0.25-0.5 per cent at present. In the short to medium term, six to nine months, the rates may increase by a maximum of 0.5 per cent. In the long term, 10-18 months, the rate of interest will fall by 2-2.5 per cent. So for one to two years, you can take a fixed interest rate loan provided the rate is below 11 per cent. It is not advisable to lock yourself in fixed rate for long term,” adds Patel.
