Home loan rates are skyrocketing following several hikes in the rates (repo and reverse repo rates) and cash-reserve ratio, by the RBI. While the central bank’s main agenda is to provide enough liquidity for the banks and to help the government control inflation rate to an ‘acceptable’ limit, nothing seems to be in the vicinity to save the middle-class from the home loan headache. In this scenario let us analyze what are the best strategies for you in planning your debts for long term financial stability.
First of all, let us not forget the thumb rule that if you have good enough funds – either as loose cash or parked in other investment instruments – with you, it is always better to pre-close the loan, either fully or partly. Two years back the scenario was different, where a tax-free and risk free 8% return from the provident funds like investments complemented a long-term home loan at 7.5% or 8.0% rate. The case now, however, is that if you want to maintain both the home loan and liquid investments, then the before tax returns from the investments should be at least 12%. And if you would like to make a part payment, make such decisions faster before the next interest hike is effected.
Secondly, if you are in no position to pre-close or part-pay the loans, you need to work out the best possible loan options for you. First and foremost thing to do is to call up your bank and check the fresh loan interest rates for your kind of loan amount and tenor. Usually, there will be a disparity of 0.25 to 0.50% between fresh loan rates and already running ones. You need to correct it via personal requests made to the bank, without fail every quarter. Also while the rates are going up opt for an increased tenor against increasing the EMI option. If not, knowingly or unknowingly it could affect your monthly budget (could even run into higher risk debts like credit cards over usage). Also you don’t want to shell out more money early enough when the rupee has more value. In the long run, the interest rates will anyway come down to bring the tenor back to your original term or even lesser. However, there is an exception here. You should know that your interest part of your EMI will steadily be coming down every year while the contribution to the principal goes up. If the annual interest portion has fallen far below 1.5 lakhs, you might want to opt for an increase in EMI option (once in a while) to avail maximum tax benefits on interest. Care should be applied here to make sure that you don’t end up paying a lot more than 1.5 lakhs an year, via adjusting the EMI. Another thing not to be done at all at this point of time is to convert your floating loan debt into fixed rates.
Thirdly, owing to the new monetary policy of the RBI, loans below 20 lakhs are likely to get some sops from the banks. This is due to the fact that risk weightage of loans below 20 lakhs have been reduced from 75% to 50% which might result in banks offering marginally lower interest rates for this category. If your current outstanding balance is slightly above 20 lakhs, you might want to check with your bank (or another bank) for a switchover option. This should be, however, done with care after working out the processing fee factor etc.
Next, be aware of the hidden charges and the penalties that banks might be revising from time to time. The home loan market for them will be coming down by 15% to 20% due to the rate hikes and other parameters in the construction industry. Banks will try various ways to make money to keep their bottom line intact. Fresh loan seekers too should be more careful now than ever before.
It is a good time now to sit back and think of own expenses structure of your monthly salary. Ideally, you should not have more than 25% of your take home
salary going towards the payment of loans. This figure is probably optimal if it’s below 20%. If this is the case, you should be in a position to save 30% of your income into various short and long (mixed with high risk and low risk) investment instruments. If you are a young (less than 40 years) borrower, you might want to restructure your investments now. You might want to convert up to 60% of your savings into high risk instruments like equities or equity oriented funds for long term investment horizon (>5 years) in mind. Another great option is to put up to 20% of your investments in gold with an investment horizon of three years. The gold is sure to return 15% or more annualized returns for the next three years (Visit http://www.forecasts.org/). Investments like this will surely compensate for the money outflow caused by high interest loans.