The monthly budgets of more than 3 million households have gone for a toss due to the relentless rise in home loan interest rates over the last 24 months. As people struggle to pay the increased EMIs they also worry that rates are set to rise further and will thus put even further strain on their already stretched monthly budgets. For somebody who took a Rs 25 lakh - 20 year - home loan at the bottom of the interest rate cycle, the EMIs have gone up from Rs 19,400 to Rs 24,500.

Despite the recent increases in monthly incomes, this huge increase in EMI, coupled with high inflation rates on other items of daily living, is beginning to take its toll on the monthly disposable incomes and savings.
So what options do you have to safeguard yourself against this relentless rise in interest rate?

Shift to a ‘fixed rate’ home loan
This is not advisable as very few banks provide genuine fixed rate loans anyway. Genuine fixed rate loans are those where the loan document does not have any clause in the agreement that allows the bank to change the ‘fixed rate’ of interest. These loans are not available for less than 12.50%, plus you will need to pay a fee for shifting to such loans. So your EMIs will go up immediately plus you will need to pay a fee to shift to such fixed rate loans.

This shift will remain more expensive till the floating rates move beyond the current fixed rates of 12.50%. We must not forget that interest rates move in cycles and that over the long tenure of a typical home loan, you will be able to benefit from the drop in rates (as and when they happen) also just like you have paid for the increase in rates.

Whilst the short-term outlook on interest rates clearly points to an increase, an assumption that interest rates will forever remain high, will be incorrect.

We have already seen one cycle of interest rate movements in this decade (downward from 2000 to 2004 and broadly upwards thereafter), and there is no reason to believe that this will not repeat itself. Hence, unless you are completely risk averse, you should stick to the floating rate loan.

Opting for another lender
Should you shift to another lender offering a lower floating rate loan?

This is a worthwhile option. As a rule of the thumb, if the new lender is providing a floating rate loan that is at least 0.50% cheaper than your existing lender and the balance tenure is not less than 7-8 years, then this is an option that you should definitely explore despite pre-payment charges that you might have to pay to your existing lender.

You need to be vigilant that you are getting the best possible floating rate loan in the market as some banks charge higher rates to existing consumers while giving lower rates to new consumers. So ask around in the market and keep yourself informed on this score. Remember your ignorance will prove quite expensive.

Budget balance
What are the other options to balance your monthly budget?

a. If you have the money, pre-pay a portion of your loan to keep the EMI at the same level. In most cases, banks do not charge for partial pre-payments and hence this is an excellent option, provided of course, you have the savings to make this pre-payment.

b. If you neither have the savings to make the pre-payment nor any money to pay the increased EMI, then check whether the bank is willing to increase the loan tenure and keep the EMI at the same level. However, normally the bank will not increase the tenure beyond the retirement age (normally assumed at 60 years for salaried people and 65 years for self employed people).

c. You can consider taking overdraft loans against your savings instruments (insurance policies with high surrender values, mutual fund units, shares, etc), to pay for the increase in the EMIs.

The advantage of such loans is that for a small fee you get an option to draw upto the limit. You pay interest only for what you actually utilise and as long as the total amount does not exceed the limit, you do not have to pay off either the interest or principal. Of course, all this is only a temporary palliative.

You should prepay the loan from your future savings or from the drop in your EMIs as and when the interest rates drop again.

d.  If neither of the above options are feasible, then you can consider approaching your existing lender to provide an additional loan on the security of the same house. You are likely to be eligible for the additional loan as house prices have gone up significantly in the last two years and your income would also probably have gone up.

e. Neither of option c or d are great options as you are actually borrowing money to repay your existing borrowings which is fiscally imprudent. Hence, they must be exercised after due caution. 

The best option of course, remains to rejig your budget and cut out the non essential items and manage within you monthly income.

Best of luck with this difficult exercise.

The author is the CEO of Apnaloan.com (an online guide for retail loan seekers). He can be contacted on ceo@apnaloan.com