Home buyers are in a fix. Just three-four years ago, they were happy with interest rates of 7-7.5 per cent. Now, they are staring at 12-13 per cent or even more in some cases. Put simply, it means that an interest payout of Rs 7,000 per lakh per annum has now become Rs 12,000 per lakh per annum. Almost a 75 per cent hike in the yearly interest costs.
In some cases, it is even more than that. Translate this for a Rs 20 lakh (Rs 2 million) home loan and the figures are a bit scary.
At 12 per cent, the interest cost is Rs 240,000 per annum whereas at 7 per cent it was Rs 140,000. That is, Rs 100,000 more per annum. Most homebuyers would be feeling this pinch.
The banks, meanwhile, are aggressively increasing tenures or Equated Monthly Instalments, depending on the age group. Customer calls are also being made inviting part-prepayment of the loan amount.
For instance, three years back, if a 38-year professional had taken a home loan for 25 years. Then, due to the rate hikes, his tenure would have gone up to 42 years.
In other words, he would have to now pay the home loan till the age of 80. So, the bank hikes up his EMIs and asks him to prepay the loan as there is no way he can continue to pay the loan till the age of 80. This, of course, is an extreme case. But given a choice between EMI and tenure, what option must a homebuyer take?
Says Amar Pandit, "It is better to increase the EMI instead of tenure, as a longer tenure would imply higher interest payout to the banks."
Also, if you can, opt for part prepayment as well, he suggests. To raise the prepayment amount, one could look at fixed deposits that are yielding low returns. Assuming one is at the highest income bracket, the yield on the deposit would come down even further.
"So it is better to use these deposits to make prepayment of the high-cost home loans," says Pandit.
If in the mid-twenties, one can afford a tenure increase, but this must be done to an extent. As then, one would have the cushion of additional number of years. It is, however, best to keep on prepaying small amounts as and when one has the surplus. This would bring down the principal amount as well as the interest cost on it.