Managing home loans

Prudence is the name of the game when it comes to managing your home loan interest rates. Photo by the author

Inflation is now releasing our country from its vice-like grip and the pressure seems to be easing out in fits and bursts. Inflation sent consumer home budgets skyrocketing for quite a while and those half way through their home loans took a beating with fluctuating interest rates.

Despite the roller coaster ride, home loan rates are being taken, purchasing power still remains strong and several people aim to buy real estate. Taking such rate fluctuations into one’s stride is a given. The bottom line, in the face of such fluctuations, is what a buyer can do to manage his home loan well.

Enhancing eligibility

With constantly changing rates, a prospective home buyer’s eligibility too takes a constant hit. If you belong to the population that believes they can take on a home loan, then here are a few pointers to help you enhance your eligibility for a loan, in the view of fluctuating rates. Assuming you have to deal with an increase, the implications are clear – higher interest rates mean a higher EMI. With your income remaining steady, this brings your eligibility down a bit depending on your loan tenure and payment schedule. Among the ways in which you can enhance your eligibility are: 

If you are married make your spouse (an earning member obviously) a co-applicant. A double-income family stands a better chance at securing a loan.

Those about to tie the knot need not despair, since you can club your fiancé’s income with yours. But keep in mind that this is only at the time of application and if approved you will receive the loan on production of a marriage certificate.

Providing proof of additional security other than the mandatory ones could help enhance eligibility. So take a good look at your bonds, FDs and LIC policies as well as producing a guarantor for yourself.

A good credit record in terms of timely credit card payments as well as repayments of other loans, no matter how small can be useful. Keep in mind that lending institutions already have access to such information thanks to organisations such as CIBIL.

Evaluating your repayment scheme 

One thing that you, as a home loan borrower need to keep in mind is that not every increase in home loan interest rates is passed on to the buyer. Many a times, these are absorbed by the housing finance companies (HFC) with a view to stay ahead of the competition.

Working on the assumption that home loan rates are going to increase, an individual can look at the three-year fixed rate option. This allows you to lock your interest rates for three years on prevailing figures, which could be seen as lower than what is anticipated in those three years. Though there is the option of a five-year fixed rate – the interest rates for this segment is marginally higher by around 50 basis points. Selecting a fixed-three year option will ensure that your interest rate is up for revision at the end of the time frame and will also ensure that you have a tight reign on your finances.

For those with a larger risk appetite, the floating rate of interest is also an option. Here you will have to remember that floating rates are usually 75-100 basis points lower than fixed rates. While you will enjoy the benefits of a fall in interest rates, your tenure could go up by around nine months to a year for every 25 basis points increase in rate.

Selecting a repayment scheme depends entirely on how you plan your finances. 
Bankers aver that there is another scheme in home loan repayments and that is the two-in-one loan.

This is a combination of the fixed and floating scheme and is considered to be quite useful in freewheeling situations.

A two-in-one loan is where the rate of interest is fixed for three to five years.
This will protect the buyer from a potential interest rate hike in the short term. At the end of the fixed period, the buyer can opt to either continue with the fixed rate or switch to a floating rate loan.

As an existing borrower

It is a fact that a large number of loans have been booked under the floating rate of interest scheme over the past five years. This being the case, they have benefited immensely from the fluctuating rates. However, a spate of RBI revisions and several other factors, turned the tables and it is now the fixed borrower who is smiling. Among the options for the floating rate of interest buyer is that of increasing the size of one’s EMI. Doing this will of course, ensure that your repayment tenure does not increase at higher rates.

You may also be lucky enough to avail of tax benefits on these higher payments you are making. This option is subject to how much liquidity in funds you can afford. 

Another option is that of prepaying a certain amount of your loan to ensure that your EMI remains at the present level.

This will ensure that the outstanding balance is substantially reduced, while at the same time keeping your EMI at the original levels.

Once again this will depend upon your liquidity and how much you will be able to put together. You will also have to take into account any penalties that a prepayment will accrue.

Switching loans

Most credit card users will be familiar with the concept of switching credits. An outstanding amount on the credit card of a bank will be completely taken over by another at a lower rate of interest.

All this in a bid to woo a customer. The same also applies to home loan borrowers. There is often a bid to switch to a bank that provides a lower rate of interest. Consider the prevailing home loan interest rate scenario before making a decision.

Before switching from a floating rate of interest to a fixed keep in mind that there is a conversion fee of approximately two per cent of your outstanding amount.

The foreclosure penalty and well as your new processing fees may result in an amount that beats your purpose in the first place. 

There are other factors that you should consider such as the move to hike or lower interest rates is not done simultaneously. If you decide to shift banks to avail of a lower rate, you have to remember that they too can hike rates.  Hard luck should it be right after you have made the switch. Moreover, their hike can be higher than the one you just left. Also keep in mind that switching loans is a tedious task and really not one you will enjoy doing multiple times, irrespective of the monetary benefits it will bring in its wake. 
Prudence is the name of the game when it comes to managing your home loan interest rates.

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