| Most home loan borrowers opted for floating rate | | | | repaying a higher proportion of interest in the initial EMIs. |
| loans in the past five years. Unfortunately, banks | | | | The interest can hover anywhere around 80% in the |
| increased the rate on these loans three to four times | | | | beginning. |
| in the one and a half years. Now, the borrowers are | | | | Interest component falls down and principal component |
| feeling the heat of increased rate of interest. | | | | goes up as a proportion of the EMI with the loan |
| Those who thought themselves to have sailed safely | | | | tenure. For that reason, many of home loan borrowers |
| by buying floating rate loan at 7% in 2003 are now | | | | assume not to prepay an apt way, say, after half way |
| highly tensed. Most banks are charging around 11.50% | | | | through the loan tenure, because the interest falls. |
| interest rate. | | | | The interest outgo as a percentage on outstanding |
| Let's take a case supposing home loan amount to be | | | | principal will remain same every time. As home loan |
| Rs 10 lakh and the tenure as 20 years. With the | | | | rate is evaluated using reducing balance method, the |
| increased rates, the EMI changes from Rs 7,753 to Rs | | | | interest rate is always evaluated on the remaining |
| 10,000 or if one wants to keep the EMI amount same, | | | | outstanding principal. |
| the tenure would increase by more than 10 years. | | | | Now, the interest which requires to be distributed |
| Kind of Options Available | | | | accordingly in the remaining tenure would also be low, |
| It is always adviseable to pre-pay any loan, including | | | | resulting in lower interest amount component. However, |
| the best home loan, if you have extra cash available | | | | there would come no change in the rate of interest |
| with you. Most people think that the principal amount | | | | which will remain same at both the periods. |
| outstanding has not reduced even after paying EMI for | | | | Your home loan tenure should not be a driving factor |
| three to four years. | | | | for you to narrow down on the option of prepaying |
| Considering the above example again, if the borrower | | | | the loan. It should largely depend on current interest |
| prepays at the end of fourth year, the outstanding | | | | rate and the amount of spare cash with you. |
| principal is still around Rs 9 lakh. The borrower is | | | | |