Typically, for a buyer, it is difficult to look at his home in a clinical sort of way. The emotions and other intangibles play a strong role. He'll usually try to cut back on everything else to retain the house, even if its cost has gone way above what he was looking at when he bought it.
Even though he doesn't, strictly speaking, own the home yet, in his mind he does. Thus, selling is not really an option. So, what can he do to reduce the financial pressure?
The salvage options
Now, to become debt free, he will have to repay the loan. To expedite the process, he has to bring the total cost of the house closer to what he was expecting to pay when he bought it, that is, he has to reduce the interest outgo in some way.
This would mean reducing the tenure, or EMI, or both. There are three possible ways—switching, refinancing or part-prepayment—to achieve this end. Let's see how they work.
A. Switchover. To attract people to home loans, lending institutions try to keep the interest rate for new loans as low a possible. At present, it is around 11.50 per cent per annum on a reducing balance on a floating rate loan taken for 20 years.
This loan will be linked to a BPLR and the interest rate on it will move with that BPLR. BPLR varies across lenders largely dependant on the cost of funds.
If you had taken a floating rate loan, yours, too, would be linked to a BPLR, although it would be different from the one for a new loan and you are likely to be paying interest at around 12.75 per cent per annum now.
Image: An Indian couple with their kid step out of a shopping mall in Kolkata | Photograph: Deshakalyan Chowdhury/AFP/Getty Images
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