MUMBAI: After the unexpected policy rate hike on September 20 by the Reserve Bank of India (RBI), many banks are contemplating an increase in their lending rates. If they decide to hike their base rates, home loan borrowers may have to deal with a ballooning EMI once again within a short span of time.
Several lenders, including the State Bank of India BSE -0.88%, ICICI Bank BES -0.8%, HDFC and Axis Bank BSE -0.77%, had raised rates by 10-25 basis points during the last month. If you are one of those borrowers saddled with an unmanageable EMI, you need to consider taking some of these measures to deal with the challenging situation.
The elimination of prepayment penalty on floating rate loans has made it easier for borrowers to switch lenders. If you can secure a lower rate from another lender, you should consider switching your loan. "Customers should connect with their current lenders and seek reduction in rates on their loans. In case the negotiations fail, they should think of refinancing," says Vipul Patel, director with mortgage consultancy firm, Home Loan Advisors.
"Only when customers begin switching proactively, will the lenders be forced to treat existing and new borrowers fairly." You can save around Rs 2,000 per month on a Rs 50-lakh loan (with a balance tenure of 17 years) if your new lender's rate is lower by just 25 basis points.
Another option is to go for the conversion facility. Banks allow you to switch to the current rate (which is always lower in order to attract new borrowers) in return for a one-time charge of 0.5-1% of the outstanding loan amount. It saves you the trouble of going through the documentation process all over again.
However, you need to do a cost-benefit analysis before making a choice between switching and conversion. "The conversion option may work for smaller loans in the under-30-lakh segment. But for higher loan amounts, it would be commercially wise to switch to another lender as processing fees are generally capped by most banks at Rs 10,000, or 0.25%, for balance transfers," explains Patel.
Ask for a Repayment Holiday
If you are facing a financial crisis or staring at the likelihood of job loss, you should consider this option.
"A number of borrowers, who are approaching us these days, are struggling to service their EMIs after losing their jobs. In such cases, you have to discuss the matter with your lenders and apprise them of your financial situation. If the bank is convinced about the genuineness of your problem, it might grant you an EMI holiday for a short period or till the time you get another job," advises VN Kulkarni, chief credit counsellor with the Bank of India-backed Abhay Credit Counselling Centre. However, remember, granting such relief is entirely at the bank's discretion as unlike corporate debt, there is no standard framework in place to restructure distressed individual loans.
Make a Part-prepayment
If you are sitting on huge cash surplus, you can consider this option. Part-prepayment brings down the loan amount and interest outgo. You can save a lot of money on interest, if the loan is relatively new. If you are a floating-rate borrower, you don't have to pay any prepayment penalty as it has been abolished by the Reserve Bank of India a year ago.
"Many people hold investments that earn, say 10%, while their home loan interest rate is 11%. In such cases, they can look at liquidating those investments and use the funds for part prepayment. Unless, of course, they are meant for certain financial goals. In which case, they should not be touched. Reduction in loan amount, and hence EMIs, will ease your monthly cash flows," says Harshvardhan Roongta, certified financial planner, Roongta Securities.