Home loans: How to cope with rising EMIs

Your floating rate home loan EMIs have suddenly jumped by a few hundred rupees a month. How do you handle this extra outgo?

What is the best home loan strategy for you now that interest rates are on an upswing? What should you do if you have money to prepay the loan but the bank is not letting you do it? Should you switch your lender?

How much percentage of net monthly take home should you aim to pay as EMI on home loans?

For those of you who missed the chat, here is the transcript.

vinayak asked, I have a home loan from IDBI Bank. In January, I received letter from them asking me to pay more EMI ( starting from June) and letter says the current interest rate is 9.5 per cent. Now the Interest rates have increased post that. This I came to know from the media and no official letter from IDBI yet. So are they going to change what they have offered me in January? I am ok with that i.e. paying the new EMI from June.

Harsh Roongta answers,  Obviously interest rates on a floating rate are going to go up beyond 9.5%. The current ongoing interest rate on a floating rate loan is around 11% at least. So it is highly unlikely your rate will remain at 9.5%. You can enquire from the bank or from its call centre about the interest rate applicable for your loan.

mspravin asked, Is there any relatiohship between bank rate of interest and property prices? Please explain the same.

Harsh Roongta answers, Absolutely there is. Most (greater than 60%) of residential property is bought by taking a loan from a bank or housing finance company, HFC. When lenders raise the interest the EMI increases and hence the amount of loan that one can get decreases.

Therefore any increase in interest rates affects affordability and the kind of savage increase that have happened in the last 3 months clearly reduces affordability very significantly. Very clearly the widespread expectation is that property prices will soften as demand reduces somewhat.

Rnair asked, Hello Harsh, I took a home loan more than 2 years back for an under construction building. Building work has been slow & have received just 40% of the payment. Have been paying Pre-EMI interest charges to the bank. My agreement doesn't have a clause wherein I can prepay pre-emi charges. I have finance ready to make the payment, however,bank doesn't allow to make it till full disbursement is made. Can you please advice how I can save on pre-EMI interest. Thanks.

Harsh Roongta answers, The only option if your bank is not allowing a pre-payment is to switch your lender and go to another bank. However given the fact that the building progress is very slow a new bank may not be very favourably inclined to take over this loan notwithstanding your good track record on payment of pre-EMI. The best you can possibly do is not to take fresh disbursement from the lender and pay any monies demanded by the builder yourself. By doing this you can save any additional outgo on pre-EMI interest.

mohan asked, I am thinking of buying a house for Rs 20 lakhs. But I have a doubt. Will the real estate prices come down due to increased interest rate and US slow down market. Shall I wait and watch? Because I am not more concerned for interest rate as it will fluctuate, but want to know whether real estate will come down in near future?

Harsh Roongta answers, There is a wide spread expectation that property prices will soften in the next 3-6 months. This kind of expectation almost becomes a self fullfilling prophecy. So unless you are completely risk averse (and therefore unwilling to take the less likely risk of the property prices rising in the near term) you can wait and watch for the next 3-6 month to see how the property market plays out over the next few months.

premtiwari asked, I had taken a home loan in 2004 from Stan Chart of Rs 14.77 lakh @ 7.45%. Now the rate of interest, ROI, is 10.45%. What should I do? I am 33 years and working for a navratna PSU at middle management level. pls advice.

Harsh Roongta answers, If your interest rate continues to be 10.45% even at the current times it is a good rate and you should continue with the loan. If you have the funds you can partially pre-pay the loan to bring down the EMI and/or the tenure. A good way on how to cope with rate increase guide can be accessed by following this link. http://www.apnaloan.com/articles/home-loan-india/homeloaninterestratehike.html

purnendra asked, I have recently taken a home loan of Rs 25 lakhs @ 9.5% (Fixed for 3 years) from HSBC. Is my decision correct to opt for a fixed rate at this point of time?

Harsh Roongta answers, Currently 9.5% is an excellent rate. So continuing with the loan makes huge sense. But keep a watch on the yearly statements that come in to ensure that the rate that is charged is 9.5% only and not any higher rate.

The loan agreement with any bank contain clauses that allow the bank to raise interest rates on 'fixed rates' even during the limited 3-year period as in your case. You can use the loan amortisation calculator to find out your outstanding loan amount at the end of any month. Please follow this link. http://www.apnaloan.com/loan-advice-india/amortisation.html.

When you 3-year 'fixed' period is over please review the new rates that the bank charges you and if that is higher than what the market is offering at that time you can look at switching your lender at that time.

athar asked, I have taken loan from ICICI bank and it is the only bank which does not take much time to increase the interest rate compared to other banks. Is it the best time to switch my loan to some other bank? Also, will you advise to make part prepayment for loan amount to decrease the tenure as well as interest?

Harsh Roongta answers, as far as coping with interest rate hikes is concerned , if you have the money you should prepay so that your EMI and tenure remains constant. 

anik asked, I have taken a fixed rate home loan @8.25% in December 2004 from ICICI. So far there is no word from the bank about rise in rates. Is it likely?

Harsh Roongta answers, Just check your loan agrement to see whether it has a clause that allows the bank to increase the interest rates under any circumstances. The bank mentioned by you is one of the few banks which has had a genuine fixed rate loan (means that the agrement does not have any clause which allows them to increase interest rates) since late 2004. Even if your loan agreement contains the clause allowing the bank to increase the interest rate it is unlikley to have been used to actually increase the rates.

kiran_gazz asked, Hi, i AM PLANNING TO TAKE A HOUSE (FLAT). IT COSTS SOMEWHERE AROUND Rs 25-30 LAKHS AND MY PRESENT SALARY IS Rs 3.2 lakhs PA. SHOULD I GO AHEAD WITH PLAN AND IF YES .. WHICH BANK HOAM LOAN SHUD I GO FOR?

Harsh Roongta answers, as far as buying of house is concerned it has already been answered. please check the transcipt of this chat message. as far as which bank is concerned there is no such thing as a 'best bank' in the market.

If such would be the case, all other banks and schemes would have no consumers at all. Different banks are strong in different areas depending on the type of client, the type of property and specific loan needs. You will have to explore the market to find the 'best bank' suited to your needs.

Anita asked, Hi Harsh, Can you suggest how much percentage of net monthly take home should one aim to pay as EMI on house loans?

Harsh Roongta answers, Very interesting question. The percentage will vary depending on the amount of income. higher your income , higher is the percentage that you can afford to pay as an EMI. But as a rule of the thumb around 35%-40% of your net take home can be paid as an EMI.

Vidyadhar ketkar asked, Is it advisable to take loan from small private institutes?

Harsh Roongta answers, Why not as long as it meets your requirements.

rupesh asked, SOMEWHERE IN YOUR PREVIOUS CHATS I READ THAT FIXED RATES ARE NOT REALLY FIXED AND THE BANKS CAN CHANGE THESE FIXED RATES ALSO. DUE TO THIS ADVICE I OPTED FOR A HOME LOAN IN SEPTEMBER 2005 @ 7.5% FLOATING INSTEAD OF 9% FIXED BEING OFFERRED AT THAT STAGE. WAS I MISLEAD BY YOU AT THAT STAGE..... ITS IMPORTANT FOR A LOT OF PEOPLE HENCE PLEASE ANSWER?

Harsh Roongta answers, 2 points. Firstly in all our advise columns we have repeatedly said that choosing between fixed and floating is not an one time desicion but something that needs to be reviewed every six months. Secondly home loan is a long tenure loan (possibly 15-20 years).

In the 18 months of your loan tenure you have already enjoyed rates lower than the 9% fixed that you would have paid in september 2005 itself (quite apart from the fact that it would also have affected your loan eligibility as well as cast a shadow of doubt over your mind forever about whether the bank will use its right to change the 'fixed' rate as well) . This needs to be set off against the 11.25% or so that you must be paying now. Thridly, you should see the impact over the entire tenure of the loan rather than just over 18 months. Please keep how much interest you pay handy and over the tenure you may still come out a winner. Best of luck.