It really is a tough time for home loan borrowers. Interest rates on home loans -- be they fixed or floating -- are going through the roof, and so is the equated monthly installment, EMI, throwing monthly budgets out of gear.
What should you do in such a situation? Here are a few things that every home loan borrower must remember now that home loan rates are expected to increase further.
1. Is it worth switching from a floating to a fixed rate home loan now?
Switching your current floating home loan to fixed home loan is not advisable as there are not many banks that offer genuine fixed rate loans anyway. Once the interest rate is fixed on genuine fixed rate home loans the banks from which you borrow cannot change the rate of interest.
Fixed home loans are not available for less than 14 per cent rate of interest today and also, the borrower has to pay a fee for changing from 'floating' to 'fixed' home loan rates which is 1.5 per cent to 2 per cent of the outstanding loan amount. This means that the equated monthly installments (EMIs) will go up immediately.
2. Are fixed rate home loans really fixed?
Now ideally as it should be, we assume that once you select fixed rate plan for your home loan the rate of interest will remain unchanged over the entire tenure of the repayment period irrespective of any subsequent increase in the same. But actually this is not the case.
All banks include the reset clause on fixed interest rate in their loan agreement. So if you have taken a loan @ 10.5 per cent for 15 years it does not mean the same rate will be applicable through the tenure of your loan.
Banks have introduced a clause according to which they have the right to revise the fixed rate home loan after two years or five years of disbursing the loan. This clause is called the Force Majeure Clause.
The statement included in the loan agreement will say:
Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies of the bank or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.
Don't let yourself to be misled by the term 'fixed rate'. For that reason, it is significantly important to go through the contents of your home loan agreement meticulously. Most of us see the home loan agreement as a mere formality. Well! This can be the biggest pitfall.
It is a contract twisted towards the lenders through different legal clauses presented in fine quality paper. You should not take things for granted. Always ask the lender bank to make you understand the agreement before you sign it. Also, ensure to bring these uneven and twisted clauses to the notice of your housing finance company and suggest the changes you need in co-operation with the lender bank.
3. What about shifting to other lenders offering a lower floating rate?
This can be a good idea especially if another lender is offering a floating rate which is at least 0.5 per cent or 0.75 per cent lower than what has been offered by your existing lender, and, more importantly, with the balance tenure of not less than 7-8 years.
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There are banks that charge high rate of interest from existing customers and low rate from new customers. Therefore, shop around the market and get informed regarding the same to avail the best deal.
4. What forces banks to increase EMIs on existing home loans?
The rising interest rates in the country today has brought this debt trap to your household. In the past few years, the floating interest rates on home loans have shot up to 12 per cent from 7.5-8 per cent.
Rate of interest and principal are two basic components involved while calculating EMI payment for any loan. In the first few years of your loan repayment tenure, a major part of the amount goes in paying up the interest. The trend reverses after a few years -- after you have paid much of the interest -- and the principal repayment increases.
Today, when home loan interest rates are high everywhere, banks have to increase tenure up to a certain point. If the interest rate continues to go up, the EMI you pay fails to cover the loan amount.
Moreover, increasing the time period is not seen as a solution to cope up with the rising interest rates. Hence, banks are forced to increase the amount of EMI.
5. What are the options to reduce the EMIs?
If you have extra money, it is recommended that you pay a part of your loan to keep the EMI at the same level. Since most banks do not charge part pre-payment penalty, it can be an excellent option.
In case you find the increase in EMI unfeasible, you should check whether your bank is ready to increase the loan tenure while keeping the EMI at the same level.
However, banks generally do not increase the tenure beyond the retirement age which is 60 years for salaried people and 65 years for self-employed.
6. Is it the right time to buy a home?
Interest rates are likely to go up further, which could affect demand, putting property prices under pressure. However, if you want to buy a house for your own use, this could be a good time.
The value of borrowed amount is depreciating (decreasing in value) because of inflation. If the value of the property you are buying does not depreciate, your investment will give you handsome return. Of course, that is a big IF.
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