5 smart ways to keep your RISING EMIs in check

Despite rising borrowing costs and home loan EMIs, borrowers have some good options to keep their rising EMIs in check.

The biggest impact of the rising interest rates is going to be on retail consumer. You and I are going to be worst hit by this because, over the past year, average EMI has gone up by 30 to 40 per cent: KV Kamath, non-executive chairman, ICICI Bank.

The above quote by this outstanding banker sums it all.

Post RBI's recent hike in repo rates (rates at which the RBI lends to the banks), leading housing finance companies such as HDFC have raised interest rates by 50 basis points and passed rate hike to consumers. It is very evident that the common man is worried by these frequent interest rate hikes in addition to inflationary pressures on basic domestic consumption items.

The first thing you as a smart home loan borrower need to do is to go online and login into your loan account. Have a look at number of EMIs you need to pay. If you have a floating home loan, you may be surprised as interest rate hike may have extended your loan's tenure by several years.

So there's definitely an urgent need to plan out preventive measures to make sure EMI don't spin out of control. A well laid out strategy is the need of the hour.

Definitely there are some options in front of consumer to realise this. Borrower can do some smart things to keep EMI in check:

Courtesy: www.investment-mantra.in

1. Negotiating the interest rate

Negotiating the interest rate with loan finance company is a smart option. Problem is that not much people are aware of it. Some banks do allow borrowers to refinance the loan at lower rate by paying a small refinance fee. By paying some refinance fees, you can bring down interest rate on your loan.

Do check with your bank now. Don't assume anything.

Banks generally charge 0.1 to 0.5 per cent to reduce interest rates by 1.5 to 1.75 per cent depending on spread available, time at which you took the loan, tenure and the interest rate applicable then. But again this doesn't apply to all.

2. Refinancing the loan

Refinancing the loan is another option but needs to be carefully evaluated and should be considered if you fail to get your interest rates reduced. This option should be fruitful if your are paying more than the market rate.

Make sure you are  ready to take up all the paperwork required to take fresh loan if it translates into substantial savings. Make sure you take into consideration 2 to 3 per cent penalty which existing bank will impose for refinance of loan.

3. Prepay partially

We at investment-mantra.in believe that this should be part of your strategy irrespective of interest rates are high or low. Home loan takers and to-be home loan borrowers should always keep investing separately for prepayment and down payment goal respectively.

For instance, if you plan to pay significant amount of principal after five years, why not invest small amounts of money through SIP route in mutual funds every month to realise this?

At current times it may or may not be possible as this depends on the borrower's liquidity condition. If you can afford, surely prepay partially.

You can also think of liquidating your low-yielding investments such as fixed deposits and debt funds to prepay for home loan. This is more significant if loan is taken recently and is for a long tenure.

For instance, if you have taken a loan for Rs 50 lakh for 20 years at 9.5 per cent and you prepay Rs 2 lakh at the end of first year, you can reduce your tenure by 24 months.

4. Increase the EMI

If prepayment is not possible, you can look to increase the EMI though this will add to borrower's monthly outgo. It will definitely help to retain the original tenure. A small increase in EMI can help offset substantial increase in the loan tenure.

5. Increase the tenure

This is of course the last option. This is a default option unless the term extends beyond the borrower's working life.

Bottom line is that you need to be proactive with your decision-making to counter high home loan interest rates  before it becomes a big unmanageable headache. So be smart and get that RISING EMIs of yours in check.