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Consumers pre-paying loans as rates increase

Submitted by on Wednesday, 24 September 2008No Comment

Consumers are prepaying the home loans as the interest rates are soaring. Many middle class borrowers have been forced to even sell their properties to clear the dues. “In pre-payment of a property loan, the borrower pays all or a large part of his loan with a lump-sum. The objective is either to close the loan or to reduce the number of installments, usually to negate the impact of rising interest rates. The bank adjusts the lump-sum amount against the outstanding balance of the loan, and depending on the bank, charges a pre-payment penalty,” says Pankaj Renjhen, MD (Mumbai), Jones Lang LaSalle Meghraj. Pre-payment, thus, brings down the principal amount and in turn the EMI or the tenure of the loan. Depending on what your concern is — paying a higher EMI or having a longer tenure — you can ask the bank to recalculate your loan.

“In consultation with his personal financial adviser, one can also consider liquidating some fixed income investments (such as fixed deposits) to repay a portion of the home loan,” advises Harsh Vardhan Roongta, CEO of apnaloan.com. Another option is to leverage ‘surplus’ such as a bonus or maturing fixed deposits/life insurance policies or national savings certificates etc, and prepay. “There are some investments which are ‘locked up’ for a time period and liquidating these right then might entail losses — so this might result in a delay before the investment can be ‘liquidated’ and then, pre-paying the home loan on that future date makes sense,” says Kapil Wadhawan, VC and MD of Dewan Housing Finance. Part-prepaying should, however, be done “if the consumer is absolutely sure that the finances available will not be required keeping a 3-5 year horizon in mind,” says Ashish Mehrotra, business manager — mortgages, Citibank India.

However, in the first place, one should decide whether the benefits of closing one’s home loan early outweigh the income tax benefits of keeping it live. Before one makes the actual prepayment of one’s loan, one needs to keep sufficient cash reserves to pay the pre-payment penalty, if any, and to address any unforeseen charges that the bank may levy.

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