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Foreclosing loan, a better option
In 2004, housing loan was available for 7.5 per cent floating rate. The same has now gone up to to 12 per cent. The question every borrower is facing is whether he or she should partially foreclose the account. What will be the possible savings?
For example, if one had borrowed Rs. 20 lakhs at 7.5 per cent interest for a term of 10 years, the EMI is about Rs.23, 471.
Now, the interest rate has gone up to 11.75 per cent and the EMI is 28,406. If he has saved Rs 5 lakhs in the last three years through other sources, would it be better that he pays Rs. 5 lakhs towards the loan? Let us work out the options.
Options
By paying Rs. 5 lakhs towards the loan, the EMI would come down to Rs.21,305.
This would fetch him a monthly saving of Rs.7, 101 towards EMI.
If he were to invest Rs 5 lakhs in other deposits, it would fetch him only Rs 4,125 per month at 10 per cent interest.
It would be advantageous to pay Rs. 5 lakhs towards the loan and reduce the liability.
In addition the loan can also be transferred to another bank, which may offer lower interest rate.
Let us look at Adjustable Rate Home Loan.
Loan under Adjustable Rate is linked to Retail Prime Lending Rate (RPLR).
Revision
The rate of interest on loan will be revised every three months from the date of first disbursement.
If there is a change in RPLR, the interest rate on loan may change.
However, the EMI on the home loan disbursed will not change subject to certain conditions.
If the interest rate increases, the interest component in an EMI will increase and the principal component will reduce resulting in an extension of term of the loan and vice versa.
Choice
The two in one home loan provides customers with a choice of breaking up the loan requirement into adjustable and fixed rate loans.
This helps them hedge their interest rate risk against rising interest rates to the extent of the fixed rate portion of the loan.
Simultaneously they take advantage of falling interest rates, with the adjustable rate portion.
C.H. GOPINATHA RAO
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Property Plus
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