There is large section of borrowers, who are psychologically averse to taking loans and are actually forced to take loans under circumstantial compulsions. Given their aversion to debt, many loan owners are only too eager to prepay their loans as and when their finances look up. However, this is not always the most economical option and one should consider various factors before deciding on this course.
When you are in a loan you are paying EMIs or equated monthly installments which are nothing but fixed payment amounts made at a specified date each of calendar month. However, an EMI will always include the principal repayment and the interest part to be paid over a specified number of years. The rate of interest and the tenure of the loan are the two important aspects. If we take a home loan for Rs 20 lakhs for a tenure of 20 years and the rate is 10 per cent. Then the total interest you pay would turn out to be Rs 26,32,103 in 20 years which translates into your property costing you more.
The extra amount is due to the interest charged. Paying interest is unavoidable. However, the interest amount can be reduced by reducing the tenure. When you take a smaller tenure your monthly EMI may be high but the total interest amount will be much lesser, thus saving a lot for you.
It can also be to one’s advantage to refinance to a lower mortgage interest rate even when one is managing one’s finances well. This can enable you to invest in another lucrative venture or buy another property by sparing a greater monthly income at your disposal.
Brijesh Parnami, CEO, Destimoney Advisors, says “Qualifying for a lower interest rate on your home loan will save you money over the long haul. A lower rate of interest can also lower your monthly payments, which may help get you out of a financial bind if unexpected hardship strikes. If you find yourself falling behind in making your mortgage payments, being honest with your bank or financial institution may get you a lower interest rate without you having to refinance a new loan. But often, in the absence of awareness about the facility of restructuring interest rates or lack of good advisors, people struggle with financial strains and continue to suffer hardships. Some, even default on their payments, or have to sell major assets to make ends meet.”
All you need to do is gather your documents and speak to your bank. Most banks are ready to help create more congenial conditions that will allow you to pay back their loans successfully over the long run. As much as you do not desire to default on your payments, your bank too would is keen to ensure that the loan repayment is made smoothly. Banks are also keen to make you stay with their services, rather than force you out to another lender.
Rishi Mehra, founder, deal4loans.com, felt that for the buyers, who are yet to go for loans, small tenures are suitable option. But for those, who are already running a home loan and thinking to prepay, making home loan prepayment from balance in accounts or contingency fund, should certainly be a consideration.
“Opting for prepayment of loans is undoubtedly a wise thought. However, since ‘pre’-paying would obviously mean compromising on other budgets it is important to ensure that one has at least four times the monthly income as contingency fund in his accounts. Any amount more than that in the saving account or current account can be used to prepay home loan,” said Mehra.
If you are running a home loan, always talk and negotiate with your bank, provide evidence of financial constraints, check all options available at your lender’s end, cite your payment history to present a positive future and be proactive after checking the rates.
“Speak to your bank and inquire about provisions to reduce your interest rate or make other adjustments to your loan terms as a way to decrease your monthly payment. Discuss your financial constraints and explain how you plan to go about the new repayment arrangements,” Parnami suggested.
Then you need to meet your bank executives and provide them information and evidence about the financial problems you are facing lately. In case of a medical emergency, make sure to provide your medical bills to make evident the financial drain you are experiencing. Keep your documentation complete and write to the bank formally, if required with the request. Not just proof of the additional financial burden, also keep ready the evidence of all your payments and expenses you incur every month vis a vis your monthly income to make your case.
Parnami said, “Keeping yourself informed pays. Even if your finances are going all smooth, you should be proactive about the prevailing rates. Many banks continue to discriminate between old and new customers, charging the existing ones a higher rate than that being offered to new borrowers. If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers. With RBI abolishing the prepayment charges, switching from one bank to another is not at all costlier now. It has boosted the spirit of the borrowers for going ahead with the negotiation discussion with their existing lenders.”