MANAGING INTEREST RATE HIKE

Over the past few weeks, many banks have increased their benchmark prime lending rates (PLRs). The PLR is a reference or benchmark interest rate used by banks for lending. The central bank's recent decision to increase the key rates had many banks feel the pinch of increased cost of funds. To maintain profitability, the lenders passed on this burden to home loan borrowers.
Take for instance the case of Rahul, who had borrowed Rs 25 lakhs at 13% floating rate of interest. His EMI due was around Rs 37,000 computed for a tenure of 10 years. The lender increased his rate of interest to 15%. What would be his EMI outflow after the increase? It comes to around Rs 40,000.
For borrowers on a tight budget, such an increase in rate could be worrying. Instead of panicking, the borrower must learn to manage his finances and debts more efficiently.
Here are a few tips:
Be prepared
Borrowers who have taken a floating rate of interest must anticipate fluctuations in interest rate. Some lenders do not even send a formal communication on rate increase to their borrowers. Nor do they warn their customers of any impending rate increase.
Set aside a small amount every month that you could use in case the bank suddenly decides to increase your EMIs. Buy early
Buying early ensures you become debtfree very soon. Also, repaying your home loan earlier in life enables you to augment other investments sooner.
Borrow as much as needed
Heavy debts take a longer time to clear and could be more challenging. Borrowers who are unable to repay might default and lose their dream home.
Avoid more debts
If you are unable to make home loan repayments, explore a suitable repayment option with the lender. Indulging in more personal loans and credit card purchases could make the situation worse to handle. Desist from wasteful expenditure.
Explore alternate sources
A gold loan, loan against security or borrowing against any property could help you raise the much-needed funds. Do not stop contributing to your emergency or contingency fund. Explore if you have other assets that you could sell and prepay your home loan as much as possible.
Increase tenure
So, if Rahul increases his loan tenure to 18 years from the original 10 years, his EMI due drops to Rs 33,500.
Courtesy Times Property dtd:-23/10/2010
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