you have money stashed for future, now perhaps is the time to air it. Especially if your treasure is not giving good returns or bonuses. You should prepay if you can. Several banks allow a home loan borrower to partially prepay up to a certain limit without any penalty.
Although, do take into consideration that if you decide to prepay the full outstanding loan amount, you are likely to incur the highest prepayment charge. Your task is to find out the specific prepayment penalty levied at different stages of the tenure of the loan as banks have different charges for prepayment at different timelines.
Banks charge 1.5 % to 4 % of the loan outstanding as prepayment charges from home loan customers. Also, the pre-payment penalty charges differ if you prepay using your money or you take another loan from another bank. For instance, banks such as SBI and Canara Bank do not charge prepayment penalty if you pay with your own money.
The RBI is already contemplating waiving prepayment penalty and is awaiting the comments from Indian Banks Association on its proposal to do away with prepayment penalty on floating rate home loans. Recently, the Banking Ombudsmen Conference suggested that banks should not impose prepayment charges on loans with floating rate of interest. (More than 95 % of the borrowers have taken home loan transfer on floating rate basis.)
In a circular a couple of weeks ago, NHB told housing finance companies (HFCs) that they could charge prepayment penalty if the loan, at fixed rate interest, was pre-closed out of one’s own sources.
“Prepaying the home loan will not only bring down the outstanding loan amount but will also help you close the loan much earlier and save big. In case the borrower did not have additional funds then he should opt for a higher EMI and keep the loan tenure constant,” says Jaideep Lunial, a certified financial planner.
EMI or tenure
If you could manage the increase in EMI, this is still a much better option than increasing loan tenure. Although staggering the burden through a longer tenure may give temporary relief, it is an expensive option. In fact, according to Lunial it is the “worst option”. So consider it only when you absolutely cannot increase your EMI amount.
Switch to another lender
Ask around and see if you could benefit by switching your bank. “The borrower needs to see the differential rates and the cost benefits. If the saving is substantial, then the borrower should take the pain of shifting his loan to another bank,” says Patel.
Be wary of fixed rate
Banks such as ICICI, Housing Development Finance Corporation (HDFC), LIC Housing Finance and Axis Bank have launched fixed interest rate home loans. They claim that fixed rate loans would give customers the certainty on the EMI they need to pay for the entire loan tenure. But these loans are mostly a mix of fixed and floating interest rates. For a specific period, say around 1-5 years, the interest rates are fixed after which they are converted to floating rate. Check the fine print of your fixed loans. Calculate your home loan emi with home loan emi calculator
According to Patel, rates have peaked, and therefore, banks are offering these products. “Interest rates are in the range of 10.75 % to 11.25 % so the upward scope is 0.25-0.5 % at present. In the short to medium term, six to nine months, the rates may increase by a maximum of 0.5 %. In the long term, 10-18 months, the rate of interest will fall by 2-2.5 %. So for one to two years, you can take a fixed interest rate loan provided the rate is below 11 %. It is not advisable to lock yourself in fixed rate for long term,” adds Patel.
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