Coping with high EMIs

Coping with high EMIs
Ramganesh Iyer for Express Money Posted online: Monday , January 21, 2008 at 1339 IST

If you took a home loan at rates prevailing in 2005 (around 7.5 per cent), you must be feeling the heat now. If you had borrowed Rs 20 lakh for 20 years, your EMI would have increased by Rs 3,500 or more. What options do you have today?

Increase tenure. If you are not near retirement, and if your original tenure was less than 20 years, your bank should increase the loan tenure. The other benefit of this is that due to inflation, the real cost of your loan will decrease over the years.

Prepay. If you have surplus cash, prepay part of your loan. The EMI on remaining principal will remain the same as earlier.

Switch banks. This involves a sizeable transaction cost, besides time and hassle. Your old bank may charge a prepayment penalty, and the new bank, processing and administration fees. Switch banks only if the rate differential is at least 0.5 per cent.

Avoid a bad deal New borrowers should do their groundwork. First, avoid taking on an EMI that is too close to your monthly surplus. Expenses have a tendency to shoot up over the years, while income is more unpredictable. By keeping an adequate buffer, you ensure that interest rate increases do not hurt you.
Scout around for the best deal. PSU banks are slower in processing the application, but usually offer slightly lower interest rates.

Finally, before signing the papers, read the fine-print carefully. Of special importance are the clauses that permit the bank to reset interest rates, and pre-payment related clauses. Change the bank if you find a clause that is not acceptable.

The author is a certified financial planner.