How to Cope with Rising EMIs

Higher interest rates have started to burn holes in the customer’s pockets. The average middle class owner is now faced with a double whammy – spiraling inflation and high interest rates.

The interest rate cycle has turned over the last two years, with floating rates climbing by 66 % from 7% only a few years ago to 11.50% at present. Those customers who have opted for a floating rate of interest are now saddled with an interest rate of about 13%. Consequently, the monthly payout by borrowers too has gone up significantly.
 
The jump in rates is primarily because the RBI is focused on preventing volatility in currency and money markets, caused by excess liquidity. In its bid to bring soaring inflation back within the range of 5 – 5.5 %, the central bank will use all policy instruments, including the CRR, to ensure the appropriate modulation of liquidity in responding to the evolving situation. In other words, till the time the excess liquidity is curtailed, interest rates will continue to go up.

Till the time the interest rates were under 9 %, banks and housing loan finance companies were merely increasing the tenure of the borrower without actually increasing the EMIs. But after the 9 % threshold was breached, tenures became unviable as they went beyond 30 years.

In the given circumstances, consumers can opt for a variety of options depending on their life stage and their financial situation. Pre-payment, of course, is a very good option, but not many can afford to repay a large chunk of money just like that. Here are some of the possibilities that borrowers can look at to overcome the crisis.

 1. Bullet Payment

If your loan tenure has already been stretched to the maximum and now if the EMIs have started going up then make a lump-sum payment, be it a bonus or money lying in savings account. A lump-sum payment will reduce the principal and thereby maintain the monthly outgo at the same level as before.

2. Accelerated EMIs

 When interest rates are at 11.50 % for floating and 13 % for fixed home loans, customers do not really have a choice as far as higher EMIs are concerned. However, accelerated EMIs is a good option in a stable interest scenario, because it can drastically reduce the payment time.
 

 3. Smart Saver Accounts

Sometime in 2004, when interest rates had started their upward journey, banks launched savings bank accounts, which were linked to the borrower’s home loan. Banks like HSBC and Standard Chartered, among others, offer this product wherein the outstanding balance is linked to a current account in such a way that the borrower pays no interest on the float amount which remains in the account.

4. Balloon Payments

For those who do not want to increase their EMIs and yet the bank cannot increase the tenure, balloon payment is an option. While some banks offer this as a product, most do not offer it as it can be unviable for the consumer.

Under the balloon payment option, banks allow consumers to pay just the interest each month for a number of years, and then pay the final balance off in one go. This option brings with itself a very high rate of interest as it does not factor in the principal at all. This type of payment is good for those who may receive a large sum of money at the time when the loan tenure is over. Under this option, payouts at the beginning are smaller but at the end, the final balance or the principal has to be paid off.

[Source: India Today, April 30, 2007]