Home Loans interest rates are shooting up to the top. RBI has increased its important rates several time within last year. It results in all the banks increasing the home loans interest rates sharply and making the big hole on house owners budget. That too who bought the house within past five years would have been very tough situation to adjust the increase in the interest rates. In this article I will write few tips which will be useful for the house owners to tackle the situation and save the money. If you have any ideas, please post it in the comments section.
Rise in Home Loans Interest Rates
It is difficult to digest that within last one year banks has increased interest rates of the home loans up to 2%. If it is only for the last year, think about the house owners who bought the house in the last 4-5 years time using the floating point method. They are paying the interest rates 5-6% more than what they bought at the beginning. It is not the small change, very difficult to manage by any middle class family person. It is the main reason why the housing default (not able to repay the loan and will be bad debt) will increase.
Read: More about Home Loans
Banks use very attracting interest rates at the beginning to lure the customers. Teaser home loans are one example for that. In the teaser home loans, the interest rates for the first two years will be very less, after that it will adjust with the market rates.
How it will impact?
Below table gives you the picture of difference in 3% interest rates increase. It makes difference Rs. 197070 more to be paid as the interest. You have to plan how this amount would be paid, whether you have enough capacity to increase the EMI amount?
The following sections will explain how to manage this situation.
Increase the Loan Duration
This method is applicable only for those who can not afford paying the extra EMI (What is EMI?) amount. For example, if Mr. X is paying the EMI of Rs.30000 p.m towards the home loans. If he has to increase his EMI to Rs. 35000 p.m. to adjust the interest rates hike, then if he can not afford the extra amount, he has to increase the tenure to few years and continue pay the same EMI amount.
Disadvantage on this solution is that you will be paying more interest amount. That will be loss for you.
Increase the EMI
If you feel that you have more capacity to increase the EMI amount, then it would be good idea. That too when situation like this, it is better to increase the EMI to your maximum capacity and try to close the home loans at the earliest. It will reduce the amount you have paid as the interest.
Prepay the Principal amount
It is the best idea to close the loan very soon. When you are paying the part of principal amount, there may be some restriction given by the banks like specific percentage of fees on the principal amount, maximum number of times in a year, etc. When you are taking the loan itself should be very clear on those terms.
For example, if you have got bonus or any other lump sum amount which is lying idle in the bank, you can utilize that amount to part pay the home loans principal amount. It will reduce the number of years you need to pay the loan.
Switch the Home Loans to another Bank
It is another good idea to tackle the situation. For this, you have to do small research on other banks interest rates and the switching charges. Normally, when you are switching you have to pay closing charges in the current bank and processing fees in the new bank. You need to calculate everything and if you find it profitable, then its better to move to the another bank. I have written separate articles on switching the home loans.
Not Good Time to Buy House
It is not the good time for the new buyers. The home loans interest rates are very high and it looks there is more rate hikes from RBI in the near future. Which would result in more rate hikes from the banks. Apart from this, real estate scenario also worrying, the house prices are very high and be very careful on investing on the houses.
This advice would not be suitable for every one, if you are the one who depends on the monthly salary and running your life with the budget, think twice before investing on houses.
Read: More about Home Loans
In this article I have wrote down few points which might be very useful for the home loans buyers. However, they need more analysis on themselves to come into any conclusion. If you have any thoughts on this article, please post it in the comments section.