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Combing Through Different Home Loan Options
With fluctuating interest rates on home loans, people interested in buying home are perplexed to go which way: Floating home loans or fixed home loans rates. The Reserve bank of India (RBI) has been using different tools such as the repo rate; the cash reserve ratio and the risk weightage on home loans. After a thorough analysis, the apex bank comes to the conclusion that banks’ exposure to the real estate sector is too high.
The situation has become more complicated for first time buyers who are hardly acquainted with the basics of home loans and the impact of rate hikes on the borrower. If it is assumed that all the borrower are income tax payers and pay at the rate of 30 per cent and getting the entire tax exemption on interest rate of Rs 1,50,000 a year.
Currently, the fixed loan rate is 14 per cent per annum which translates into 10 per cent a year after tax benefits, which remains fixed during the entire tenure. A home loan agreement has certain clauses that allow the housing finance companies (HFCs) or the bank to change the rate without any prior notice.
Most home loan borrowers prefer to opt for floating rates which is 12 per cent per annum at present. Considering the average loan size to be Rs 10 lakh, the EMI has raised by Rs 3,258 a month. It means an additional hit of Rs 39,120 per annum. And, that too within a period of two years. There has been an increase in EMI by 42 per cent in the last two years over a 20-year tenure.
But, the borrowers who are feeling the heat are the ones who opted for floating rate loans. Of all remaining ideal options, one is prepayment which is directly linked several factors like nature, risk profile, and asset allocation strategy of the borrower. There are a number of ways for a borrower to repay:
- Excess Liquidity: Depending on your budget, you can prepay the outstanding loan amount either partly or entirely. It is certainly a better option than investing the surplus in lower yield investments. This way, you can lower EMIs or keep them constant while keeping the same tenure.
Banks do not allow a rise in tenure further than the earning age of 60 years, in case of the salaried and 65 years, in case of the self-employed individual. However, the route is generally opt by the risk – averse who prefers investing in safe instruments for low returns.
- Short Term Borrowers: If your pending loan tenure ranges between 6 months to 3 years, try and repay, even up to 100 per cent of the balance amount, liquidity permitting. Taking a call on the short term interest rate movements is somewhat difficult. However, you should have a discerning eye whi2le reading between the clauses mentioned in your home loan agreement.
- Borrowers with aggressive risk-profile: They are the individuals who are always in a look out for new avenues to improve the overall yield of their portfolios. They generally find return of 15-20 per cent per annum lucrative and make efforts for it by investing their surplus into business, equities, mutual funds, properties, and commodities. Borrowers should never hurry for the repayment even if their earnings are higher than the home loan interest cost.
- High net worth borrowers: As the title signifies, they are the borrowers with a good financial health. They prefer floating rate loans as a cheap and extra source of funds, which can be deployed at a much higher rate of return. They take home loans simply to avail tax benefits.
Depending on your profile and budget, you should ponder over all the factors and decide whether to close the loan, pre pay it, or continue with the loan.
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