SHOULD YOU PREPAY YOUR HOME LOAN?
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SHOULD YOU PREPAY YOUR HOME LOAN?
YOU NEED TO CALCULATE THE NET COST OF A LOAN BEFORE DECIDING TO PREPAY WHEN THE RATE INCREASES,
The increases in home loan interest rates have upset calculations of many borrowers. Increases make a dent in the budgets of the home loan borrowers. In order to contain inflation, the Reserve Bank of India (RBI) has recently hiked the cash reserve ratio (CRR) from 8.75 to nine percent. The latest CRR hike drew out about Rs 8,500 crores from the banking system. The hike in the repot and CRR rates has led to hikes in the home loan interest rates.
Over the last couple of years, the interest rates on home loans have gone up by almost five percent - from seven to 12 percent. As such, the EMI installments have also gone up significantly, upsetting the budgets of people.
There has been a quantum jump in the number of home loan borrowers approaching banks for foreclosures and partial repayments. Many borrowers are trying to reduce the term of their loan, which have increased due to the recent interest rate hikes. These borrowers are typically the ones who have taken floating rate loans in the last 12-18 months and are now trying to make balloon payments. With interest rates on home loans rising in the last one year, consumers are now looking at other options to acquire funds for their investments.
Before deciding to foreclose, one needs to understand the implications - both present as well as future. It can hurt their liquidity in the short to medium terms, if they decide to foreclose their home loan accounts or make partial repayments.
With the increase in EMIs, many borrowers are exploring the option to pre-pay the housing loan. Before deciding whether to pre-pay or not, one should work out the net cost of the home loan. This can be done by factoring in the income tax benefit on the housing loan interest.
Normally, banks do not charge anything in case the loans are being repaid from one's own sources. However, in case one goes for refinancing, i.e. borrows from some other bank, then a prepayment penalty is levied.
The increased interest rates have put off many speculators from the real estate market. The interest rates' trend over the next few months is expected to be upwards, across the industry. On the flip side, this may actually prove beneficial for buyers as it will deter speculators from over-leveraging themselves for speculative gains.
Courtesy: - ET/FT dtd: - 14th Sep 2008