By Raj Khosla
As the second wave of pandemic hits India, it’s time to review and rebalance your personal finance portfolio. Though different individuals have divergent priorities, saving an additional buck for emergencies is one wise step for all. With multiple monthly obligations such as EMI for home loans along with essential day-to-day expenses, the benefits of reducing the EMI load cannot be stressed enough.
Lower interest rate
In the past one year home loan interest rates have bottomed out and are currently at decadal lows. With a little bit of financial engineering, you can actually reduce your EMI. So whether you availed of a loan prior to October 2019 or are servicing a home loan above 8.5% per annum, there is a good chance of a 100 bps interest rate concession. However, in case you had opted for RBI’s recent moratorium, it will be difficult to finalise a refinancing option.
Contact existing lender
It is always recommended to first contact your existing lender and ask for a rate concession basis your existing relationship and repayment track record. Moreover, you do not require documents to initiate requests with the current lender. You can contact your bank online and share your request, a little forcefully, i.e., share competitive market information. Also, if you are servicing a fixed rate variant or an old MCLR linked loan, switching to an external benchmark such as repo linked rate will cut down rate of interest. The lender will charge a nominal fee for switching and the new rates will be assigned as per the prevailing repo linked rate.
Renegotiating with an existing lender is always the priority option. An illustration : A Rs 1 crore loan @8.5% rate of interest and 15 years outstanding tenor, carries an EMI of Rs 98,474. When repriced @6.75%, the EMI is Rs 88,491. A monthly saving of Rs 10,000.
Apply for loan transfer
If the request for rate concession has not been entertained by your existing bank, search for a suitable alternate lender. Look for post disbursement services and responsive digital customer service besides the lower interest rate. With your new lender, clearly communicate your loan terms and requirements. A fresh loan agreement will be furnished and a processing fee and administration charges will be applied.
So, do the math, calculate savings, and specifically inform the lender about your intent, i.e., whether you are seeking EMI reduction and tenor extension, or top up for debt consolidation, or principal reduction.
Reference earlier example: If your age permits a five-year extension of the tenor from 15 years to 20 years, the Rs 1 crore loan @6.75% will mean an EMI as low as Rs 76,036, resulting in a whopping monthly saving of Rs 20,000.
Leverage home loan top-up
EMIs for personal loans, car loans are priced at higher rates (9-12% per annum) of interest as compared to 6.75% for home loans. Rolling over credit card balances is one of the most expensive (18%-30% p.a.) sources of funding.
Age and income permitting, an EMI of Rs 98,847 will ensure Rs 1.3 crore loan @6.75% with a 20-year tenor. Hence a release of Rs 30 lakh to square up the more expensive facilities, and then a possibility of surplus for a contingency fund.
Expect Covid hurdles
Due to lockdown, banks are working with limited physical strength. It is not possible to visit a bank personally to share the balance transfer application and to file a request for a No Objection Certificate (NOC). Furthermore, the new lender needs to carry out property valuation and legal verification prior to authorising loan sanction. All these steps require manual intervention. Thus be prepared for Covid specific delays.
The writer is founder & MD, MyMoneyMantra.com