Customers with floating rates of interest are facing the heat, as they have to fork out more in interest outgo. They may be worse off because the Reserve Bank of India (RBI) is likely to go for another round of interest rate hike to bring inflation under control.
Since March 2010, banks have hiked lending rates by 300-350 basis points. A basis point is a hundredth of a percentage.
What should the borrower, especially home loan borrowers, do in such a situation to lessen the impact of sustained rate hikes?
Pay off your loan: If you have funds available, it is better to pay off the loan than to pay prevailing interest rates of over 11 per cent on home loans. In case you do not have full amount, you can also make a part payment. Some banks allow minimum of Rs 50,000 loan prepayment every year and up to four times in a year.
In case of pre-payment of loan, you will earn a higher return on your funds compared with prevailing deposits rates. “Customers can prepay from their own funds up to four times in a year. This will reduce the total interest outgo,” said an IDBI Bank official.
Prepayment charges: Do check with you bank about prepayment charges. In case you wish to pay back your loan early, some banks may charge up to 2 per cent of the loan amount, plus applicable taxes as pre-payment penalty. Some banks waive off the pre-payment penalty in case it is paid from own funds.
To reduce interest burden on your loan, get in touch with other banks for refinancing your loan at lower rates. However, if you shift to another bank in case of a better deal, then the pre-payment penalty is applicable. In such cases, talk to your bank and renegotiate your loan terms. In order to retain customers, a bank may offer you a better deal.
“Banks often reduce interest burden for its premium customers or those with whom the bank has had long-term relationship. If such customers wish to shift to another bank, we reduce the interest burden to retain such customers,” said an ICICI official.
Pay a lumpsum amount: You can also reduce interest on your home loan and maintain the same level of EMI (equated monthly instalments) by paying a lumpsum amount to the bank. In case of a rate hike, banks either increase the EMI or increase the tenure of the loan. It is better to pay higher a higher EMI than increase the tenure of loan; or else your total interest out go may go up. In the initial years of the loan, interest component in the EMI is much higher and only a small part of instalment goes in paying off the principal loan amount.
[Source]
Since March 2010, banks have hiked lending rates by 300-350 basis points. A basis point is a hundredth of a percentage.
What should the borrower, especially home loan borrowers, do in such a situation to lessen the impact of sustained rate hikes?
Pay off your loan: If you have funds available, it is better to pay off the loan than to pay prevailing interest rates of over 11 per cent on home loans. In case you do not have full amount, you can also make a part payment. Some banks allow minimum of Rs 50,000 loan prepayment every year and up to four times in a year.
In case of pre-payment of loan, you will earn a higher return on your funds compared with prevailing deposits rates. “Customers can prepay from their own funds up to four times in a year. This will reduce the total interest outgo,” said an IDBI Bank official.
Prepayment charges: Do check with you bank about prepayment charges. In case you wish to pay back your loan early, some banks may charge up to 2 per cent of the loan amount, plus applicable taxes as pre-payment penalty. Some banks waive off the pre-payment penalty in case it is paid from own funds.
To reduce interest burden on your loan, get in touch with other banks for refinancing your loan at lower rates. However, if you shift to another bank in case of a better deal, then the pre-payment penalty is applicable. In such cases, talk to your bank and renegotiate your loan terms. In order to retain customers, a bank may offer you a better deal.
“Banks often reduce interest burden for its premium customers or those with whom the bank has had long-term relationship. If such customers wish to shift to another bank, we reduce the interest burden to retain such customers,” said an ICICI official.
Pay a lumpsum amount: You can also reduce interest on your home loan and maintain the same level of EMI (equated monthly instalments) by paying a lumpsum amount to the bank. In case of a rate hike, banks either increase the EMI or increase the tenure of the loan. It is better to pay higher a higher EMI than increase the tenure of loan; or else your total interest out go may go up. In the initial years of the loan, interest component in the EMI is much higher and only a small part of instalment goes in paying off the principal loan amount.
[Source]
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