Part payment can tame rising EMIs

MUMBAI: House owners who have opted for floating rate loans to fund their dream homes are having sleepless nights. Thanks to the Reserve Bank of India's steep hike in policy rates and the resultant increase in home loan interest rates by housing finance companies and banks, many of them have seen their equated monthly instalments (EMIs) balloon considerably. Many of them are also anxious about the future course of interest rates, as most bankers aver that the banking regulator hasn't finished with monetary tightening yet - they believe the central bank may hike policy rates further by another 50-75 basis points (100 basis points = 1%) during the financial year."It is true that home loan EMIs have gone upconsiderably. Those who have opted for 8% teaser loans are potentially paying11%," says Adhil Shetty, founder and CEO, Bankbazaar, a financial consumerportal. In 2009, leading lenders such as the State Bank of India (SBI), ICICIBank and HDFC, among others, had introduced the so-called teaser home loans,where the interest rates were kept artificially lower-mostly 8.0-8.5%-than themarket rate in the first three years. The interest rates prevailing in themarket-currently at around 10.5-11%-would apply to these loans from the fourthyear onwards. According to experts, home loan interest rates have gone up by3-5%, with existing customers paying anywhere between 12-15%.Whatmakes matters worse is that these home loan customers don't have many options towriggle out of the situation. "Unlike in the past, one can't advise them toshift to a lower interest rate with another bank because that option doesn'texist anymore," says Adhil Shetty. "It is not worth the effort to shift toanother bank which will offer you loans at half a percent or one percent lowerrate. Unless you are getting the loan at 2% lower rate, you won't save much,"says Suresh Sadagopan, chief financial planner, Ladder7 Financial Advisors."Also, the difference in the rates between the new bank and the old bank isunlikely to remain the same forever. Sooner or later the gap may narrow," headds."A customer has two options before him/her if the EMI has goneup considerably and finds it difficult to service it. One, approach the bank andextend the term of the loan so that the EMI remains with manageable limit. Two,liquidate investments in fixed deposit or mutual funds and prepay a part of theloan so that the EMI comes back to reasonable level," says Shetty. Sadagopanalso believes that customers who are paying above 12% should consider making apart-payment to bring the EMI to reasonable levels. "You shouldcontinue with some of your investments, but you should consider using thesurplus cash you may have or maturity proceedings from FD or insurance policyfor the purpose. You should remember that there is no point in investing in anFD that will earn you 9% pre-tax return when you are paying an interest rate of12% or more on your home loan," he says.