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RISING INTEREST RATES ARE FORCING MIDDLE-CLASS CONSUMERS
TO PRE-PAY THE ENTIRE LOAN OR MAKE PART PAYMENTS.
With housing loan rates hitting the roof and no respite in site,
walking away from property mortgages may seem to be a good idea. After all, the
northward movement in home loan rates in the last 3-4 years has already sent the
monthly budgets of middle-class consumers for a toss, forcing many to even sell
their properties to clear the dues.
However, walking away from property mortgages right away involves
clearing of entire dues in one go and won't be feasible for many of us. Another
option is pre-payment. In fact, those of us who cannot prepay the whole loan immediately
can consider making a lump-sum part pre-payment.
"In pre-payment of a property loan, the borrower pays all or a large part of his
loan with a lump-sum. The objective is either to close the loan or to reduce the
number of installments, usually to negate the impact of rising interest rates. The
bank adjusts the lump-sum amount against the outstanding balance of the loan, and
depending on the bank, charges a pre-payment penalty," says
Pankaj Renjhen MD
(Mumbai), Jones Lang LaSalle Meghraj. Pre-payment, thus, brings down the principal
amount and in turn the EMI or the tenure of the loan. Depending on what your concern
is — paying a higher EMI or having a longer tenure — you can ask the bank to recalculate
your loan.
If the consumer
has surplus cash (after keeping a reserve for contingencies) or if his/her fiscal
situation has improved, one can consider repayment of a portion of his loan so as
to keep the EMI burden at an affordable level. "In consultation with his personal
financial adviser, one can also consider liquidating some fixed income investments
(such as fixed deposits) to repay a portion of the home loan," advises Harsh Vardhan
Roongta, CEO of apnaloan.com.
Another
option is to leverage 'surplus' such as a bonus or maturing fixed deposits/life
insurance policies or national savings certificates etc, and prepay. "There are
some investments which are 'locked up' for a time period and liquidating these right
then might entail losses — so this might result in a delay before the investment
can be 'liquidated' and then, pre-paying the home loan on that future date makes
sense," says Kapil Wadhawan, VC and MD of Dewan Housing Finance.
Part-prepaying should, however, be done "if the consumer is absolutely sure that
the finances available will not be required keeping a 3-5 year horizon in mind,"
says Ashish Mehrotra, business manager — mortgages, Citibank India
However,
in the first place, one should decide whether the benefits of closing one's home
loan early outweigh the income tax benefits of keeping it live. Before one makes
the actual prepayment of one's loan, one needs to keep sufficient cash reserves
to pay the pre-payment penalty, if any, and to address any unforseen charges that
the bank may levy.
Banks allow
prepayment of a certain number of EMIs or a fixed number of prepayments during a
year free of charge. Beyond that, prepayment attracts charges. This prepayment penalty
ranges from 2-3% of the principal outstanding.
You can,
thus, save on prepayment charges by making partial pre-payments. "The definition
of what constitutes partial pre-payment varies from bank to bank. You can make enough
pre-payment to ensure that you still need to pay a few more EMIs (normally 12) to
completely clear off the loan. This will ensure savings in pre-payment penalty and
at the same time help you to save on high interest costs on a substantial portion
of the loan," says Roongta.
However,
"if a consumer has the money to pre-pay the outstanding home loan, he must calculate
the total net present value (NPV) of both the options i.e. regular installment vs
pre-payment. The option with the lesser NPV is preferable," advises Ashish Kapur,
CEO, and Invest Shoppe.
In case
a customer is servicing multiple loans such as housing loan, vehicle loan, personal
loan etc and has to make a choice to repay, he should first evaluate the various
loans and then repay the loan based on its cost and impact on cash flows. "As far
as housing loans are concerned, they are long-term loans and as such increase in
interest rates on home loans would have a much lower impact on the cash flow as
compared to car and personal loans which are generally shorter duration loans. Moreover,
housing loans have great tax benefits, which makes the effective interest rate lower,"
says an HDFC Bank spokesperson.
Also, prepayment
penalties can be negotiated if you have a good credit history. For a select few
consumers, banks may sometimes also waive this penalty. They may be more inclined
to ignore or reduce the penalty in situations where interest rates have been climbing
after the disbursement of the loan and the loan carries interest lower than the
market rates.
Courtesy:- ET, dtd:- 21st Sep 2008
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