Changing dynamics
April is generally the month for financial planning and tax planning. If you are a stock market investor, you would be keeping a close tab on the earnings season as India Inc. gets ready to present its report card for the previous year. However, this year, the interest rates are hogging the limelight than ever before. Just when you thought the rate hike is over for the short term and can expect your EMIs to be steady for the next six months, another round of interest rate hike is here. The difference this time is that you are not sure when your bank will send the next letter regarding your fresh EMIs. In such a scenario, property buyers will have to devise new strategies to service their home loans.
Existing borrowers
The challenge is tough for those who have just taken a home loan in less than one year on floating rate basis. Since floating rates are linked to bank's benchmark lending rate, the rates will see a rise in the next couple of months. Leading housing finance companies such as HDFC and SBI have already announced the hikes and it's a matter of time before others followed suit.
Best option for the borrowers would be to reduce the home loan liability by using any surplus cash towards loan repayment. Even if your cash surplus is Rs.50,000-1 lakh, try and use it for repayment as this would help in keeping your number of EMIs intact.
Some may not enjoy the luxury of surplus cash but may be able to digest a higher EMI due to higher monthly cash flow. It is strongly recommended that you sit with your lender and look at the option of increasing your EMIs to reduce your tenure. Some banks and housing finance companies offer the option of balloon payment, which gradually increases the EMI over a period of time.
Switching of option from floating to fixed rate could be another option for the existing home loan borrowers but we would recommend you choose this option for a short term and also it is more beneficial for those who have borrowed the loan in the last 1-2 years. While interest rate scenario looks uncertain, the short term trend continues to show signs of positive bias and hence fixed option looks more attractive at the current juncture, particularly for those who have a long tenure of home loan repayment.
The current scenario is more challenging for those who are in the process of taking up a home loan. Till recently, 90 per cent of home loan borrowers opted for floating rate option as interest rates had negative bias. In the last six months the trend has seen a reversal and hence long-term borrowers should look at the option of going for fixed option.
If your lender offers you a switch option, please opt for the same.
When interest rates start moving downwards, this will come in very handy. Some companies offer flexi package based on tenure or amount and we would recommend borrowers to look at this option more carefully.
For instance, if a lender allows you the combination of fixed and floating, it would be advantageous to opt for fixed in the short term and opt for floating at a later date. No doubt, interest rates have been on the rise in the last 18 months but borrowers should remember that it is a natural cycle.
From a level of 18-20 per cent home loan rates, we moved to 7-9 per cent level and again, the interest rate curve is on an upswing and has reached 10-11 per cent level. The only way to take advantage of the changing curve is by keeping the borrowing flexible. Also, in the current interest rate scenario, borrowers should keep their borrowing component to the minimum and look at stepping up their margin money contribution.
SRIKALA BHASHYAM
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