This is my first blog on Personal Money Management and so I am writing on a topic which would be of interest to most people, specially who has taken Home Loan.
I want to highlight how current trend of increase in the Interest Rate will affect the Home Loan Borrowers. This will be applicable to all Loan Borrowers but the blog is specifically for Home Loan borrowers.
Let’s take an example of Mr. Lucky.
Mr. Lucky has taken a Home Loan to finance his Dream Home. His Loan Amount was Rs. 25,00,000/- for 20 years , bought at 8.5% interest Rate a year back. Going by EMI Calculator, his EMI is Rs. 21696/-.
Mr. Lucky is happily living since he bought the loan without any worry about what is happening to Interest rate of his Home Loan. Since a year he took his home loan, Interest rates have gone up from 8.5% to 10%.
One day Mr. Lucky invited his friend Mr. Jignesh to his new home. Mr. Jignesh was impressed the way Mr. Lucky has maintained his house. Mr. Jignesh being a Finance Fundu, out of curiosity, asked Mr. Lucky about his Home Loan and Interest Rates. Mr. Lucky without even blinking for a second said, "Sab Set Hai Yaar" and after detailed discussion with Mr. Lucky, Mr. Jignesh found that Mr. Lucky is not aware about recent Interest Rate hikes. Mr. Jignesh then informed Mr. Lucky that RBI has increased rates 10 times in last 15 months and he should check the health of his Loan Account. Going by his friend's advice Mr. Lucky then checked his Loan Account to find that his Bank has increased the Interest rates from 8.5% to 10% and to his Surprise his loan tenure is increased from 20 years to 32.5 years, approximately, because of Interest Rate hikes.
Its very easy to find yourself in this kind of situation if you are not aware about your Loan Account Health.
Don't Worry if you find yourself in this kind of situation as there are ways out for this. I will suggest following 3 Options to repay your loan:
Option 1: Partial Prepayment
Recommendation: High
You pay a lumpsum amount to bring your Loan Outstanding down which will reduce your Tenure as well as the Interest amount you will be paying out the Loan Tenure. But considering that people generally pay 40% to 60% of their Salary as EMIs, this option needs some advance money planning.
Mr. Lucky will have to do a Prepayment of Rs. 2,50,000/- approximately to keep his EMI and Tenure same.
Option 2: Increase EMI
Recommendation: Medium
This is the easiest way of doing (Easiest way in terms of money planning) but not the best one. Some documentation work is required, like new Cheques to be issued and/or new ECS forms and some Bank formalities.
This option will change the EMI out going of Mr. Lucky from Rs. 21696/- to Rs. 24125/- to keep his Tenure unchanged.
Option 3: Increase Tenure
Recommendation: Low
This option is executed automatically by Banks when the Interest Rates increases.
Mr. Lucky's Tenure is increased by his Bank from 20 Years to 32.5 Years, approximately.
Also, to put more light, one more increase in 0.5% in Mr. Lucky's Interest Rate will take his tenure to more than 100 years which is practically impossible to pay and so if this happens, bank will call Mr. Lucky and ask him to do Partial Prepayment.
Conclusion:
1. Always and Always keep a check on Outstanding, Interest Rates and Tenure on any Kind of Loan.
2. Try to do Partial Prepayment as much as you can, this has advantages like more Principal payment, Less Interest payment, Reduction of Tenure and many more.
3. Try to be Finance Fundu and not Lucky
Few Suggestions:
Few Suggestions to help you in long term:
1. Try to take loan of less tenure but keeping in mind your EMI does not shoots too much. For example, Opt for 15 Years of Tenure instead of 20 Years, this will increase your EMI by Rs. 1000/- to Rs. 2000/- but will significantly reduce your Interest Paid in long term
2. Try to take the loan which offers minimum prepayment charges. Some banks even offer 0% prepayment charges as well
3. There are further chances of Interest Rates hikes looking at the inflation, so keep some Cash handy for Option 1
You can send me your Suggestions and Feedback to FinanceFundu@gmail.com
I want to highlight how current trend of increase in the Interest Rate will affect the Home Loan Borrowers. This will be applicable to all Loan Borrowers but the blog is specifically for Home Loan borrowers.
Let’s take an example of Mr. Lucky.
Mr. Lucky has taken a Home Loan to finance his Dream Home. His Loan Amount was Rs. 25,00,000/- for 20 years , bought at 8.5% interest Rate a year back. Going by EMI Calculator, his EMI is Rs. 21696/-.
Mr. Lucky is happily living since he bought the loan without any worry about what is happening to Interest rate of his Home Loan. Since a year he took his home loan, Interest rates have gone up from 8.5% to 10%.
One day Mr. Lucky invited his friend Mr. Jignesh to his new home. Mr. Jignesh was impressed the way Mr. Lucky has maintained his house. Mr. Jignesh being a Finance Fundu, out of curiosity, asked Mr. Lucky about his Home Loan and Interest Rates. Mr. Lucky without even blinking for a second said, "Sab Set Hai Yaar" and after detailed discussion with Mr. Lucky, Mr. Jignesh found that Mr. Lucky is not aware about recent Interest Rate hikes. Mr. Jignesh then informed Mr. Lucky that RBI has increased rates 10 times in last 15 months and he should check the health of his Loan Account. Going by his friend's advice Mr. Lucky then checked his Loan Account to find that his Bank has increased the Interest rates from 8.5% to 10% and to his Surprise his loan tenure is increased from 20 years to 32.5 years, approximately, because of Interest Rate hikes.
Its very easy to find yourself in this kind of situation if you are not aware about your Loan Account Health.
Don't Worry if you find yourself in this kind of situation as there are ways out for this. I will suggest following 3 Options to repay your loan:
Option 1: Partial Prepayment
Recommendation: High
You pay a lumpsum amount to bring your Loan Outstanding down which will reduce your Tenure as well as the Interest amount you will be paying out the Loan Tenure. But considering that people generally pay 40% to 60% of their Salary as EMIs, this option needs some advance money planning.
Mr. Lucky will have to do a Prepayment of Rs. 2,50,000/- approximately to keep his EMI and Tenure same.
Option 2: Increase EMI
Recommendation: Medium
This is the easiest way of doing (Easiest way in terms of money planning) but not the best one. Some documentation work is required, like new Cheques to be issued and/or new ECS forms and some Bank formalities.
This option will change the EMI out going of Mr. Lucky from Rs. 21696/- to Rs. 24125/- to keep his Tenure unchanged.
Option 3: Increase Tenure
Recommendation: Low
This option is executed automatically by Banks when the Interest Rates increases.
Mr. Lucky's Tenure is increased by his Bank from 20 Years to 32.5 Years, approximately.
Also, to put more light, one more increase in 0.5% in Mr. Lucky's Interest Rate will take his tenure to more than 100 years which is practically impossible to pay and so if this happens, bank will call Mr. Lucky and ask him to do Partial Prepayment.
Conclusion:
1. Always and Always keep a check on Outstanding, Interest Rates and Tenure on any Kind of Loan.
2. Try to do Partial Prepayment as much as you can, this has advantages like more Principal payment, Less Interest payment, Reduction of Tenure and many more.
3. Try to be Finance Fundu and not Lucky
Few Suggestions:
Few Suggestions to help you in long term:
1. Try to take loan of less tenure but keeping in mind your EMI does not shoots too much. For example, Opt for 15 Years of Tenure instead of 20 Years, this will increase your EMI by Rs. 1000/- to Rs. 2000/- but will significantly reduce your Interest Paid in long term
2. Try to take the loan which offers minimum prepayment charges. Some banks even offer 0% prepayment charges as well
3. There are further chances of Interest Rates hikes looking at the inflation, so keep some Cash handy for Option 1
You can send me your Suggestions and Feedback to FinanceFundu@gmail.com