Hello sir my housing loan account is with bank of india where my emi starting was 7.25 percent before 3 yrs now it is been increased to 9.75 percent I regularly ask bank official about the increased rate of interest but they tell it is becos of increasing rapo rate And replies since I am a gold costumer of bank my EMI is reduced to 9.25 percent I feel this is also very high Expert please advise

Ans: SBI charges interest on a daily reducing basis so that if you are paying a higher amount than the EMI then you will get credit for it accordingly. Your home loan would get over by 9 years if you pay EMI of 30K. This assumes that the details given by you are correct and that interest rate charged by SBI is 8.25 per cent which appears to be very low.

Ans: Yes they do it. Speak with your bank see if any reduction in interest rate is possible

Ans: You should consider the following factors to cope with finance in the revised hiked interest rate regime:

• If you have money lying idle in your bank account or have some random investments earning low yields, put it to good use. Make lump sum amount and also consider loan prepayment, which will substantially reduce your overall interest payment and helps to save interest on the loan.

• If you could afford to increase the EMI to pay the loan to maintain the loan tenure, you should go for that.

As a thumb rule, don’t opt for a loan tenure beyond 15 years. Beyond that, interest liabilities shoot up without offering commensurate benefits in the form of lower EMI. The decision to go for lump sum payment or increasing EMI depend on your upcoming requirement, goal priority and commitment’s as well. Thus, ideal situation is due cashflow analysis.

Ans: Understanding the EMI Cap on Your Home Loan
You've been proactive in managing your home loan by increasing your EMI yearly by 10%. This strategy helps reduce the overall tenure and interest burden. However, facing a cap on the EMI increase can be frustrating. Let's delve into why this happens and what you can do next.

The Concept of EMI Caps
Banks set EMI caps to manage risk and ensure borrowers don't overextend themselves. This cap is based on factors like your income, existing liabilities, and overall repayment capacity. While increasing EMI is beneficial, banks also need to mitigate the risk of default.

Why You Weren't Told About the EMI Cap
It's common for borrowers to be unaware of all the terms and conditions at the loan's inception. However, it's the bank's responsibility to ensure transparency. The EMI cap might not have been highlighted during your loan agreement, leading to your current surprise.

How Floating Rate Loans Work
Floating rate loans have interest rates that change based on market conditions. This variability means your EMI can fluctuate. When you increase your EMI, you're effectively paying off more principal, reducing the interest over the loan's life. However, this flexibility comes with limitations, like the EMI cap.

The Bank's Suggestion of Part Payment
Part payment involves paying a lump sum towards your loan's principal amount. This reduces your outstanding balance and, consequently, the interest burden. While it doesn't increase your EMI, it lowers the overall loan tenure and cost.

Is Reaching the EMI Cap Normal?
Yes, reaching the EMI cap is normal. Banks have internal policies to safeguard against potential defaults. They assess your repayment capacity and set a maximum limit on EMI increases to ensure you don't overcommit financially.

Exploring Alternatives to Increasing EMI
If the bank has capped your EMI, consider these alternatives to manage your loan effectively:

1. Part Payments
Making part payments is an effective way to reduce your principal amount. This method reduces your interest outgo and shortens the loan tenure. By strategically planning part payments, you can achieve similar benefits to increasing your EMI.

2. Loan Restructuring
You can request the bank to restructure your loan. This involves renegotiating the loan terms, possibly extending the tenure or adjusting the interest rate. This can provide more flexibility in managing your repayments.

3. Refinancing Your Loan
Refinancing involves transferring your loan to another lender offering better terms. This can include a lower interest rate or higher flexibility in EMI adjustments. However, ensure that the benefits outweigh the costs associated with refinancing.

Assessing the Impact of Part Payments
Part payments can significantly reduce your loan's interest burden. Let's calculate the impact of a Rs. 1,00,000 part payment on your loan.

Assumptions:

Original Loan Amount: Rs. 50,00,000
Interest Rate: 7.5% per annum
Remaining Tenure: 15 years
Without Part Payment:
Monthly EMI = Rs. 46,468

Total Interest Payable = Rs. 33,64,306

With Part Payment of Rs. 1,00,000:
New Principal Amount = Rs. 49,00,000

Monthly EMI = Rs. 46,468 (unchanged)

Revised Tenure = Approximately 14 years and 10 months

Total Interest Payable = Rs. 32,97,126

Interest Savings = Rs. 67,180

As seen, even a modest part payment can lead to significant savings.

Benefits of Increasing EMI and Part Payments
Increasing your EMI and making part payments offer numerous benefits:

Interest Savings:

Both strategies reduce the principal amount faster, leading to lower interest outgo.

Shorter Tenure:

They help in shortening the loan tenure, allowing you to become debt-free sooner.

Improved Credit Score:

Timely and increased repayments improve your credit score, enhancing your future borrowing capacity.

Financial Discipline:

Regularly increasing EMI and making part payments instill financial discipline and better money management.

Challenges and Considerations
While these strategies are beneficial, they come with challenges:

Liquidity Constraints:

Increasing EMI or making part payments require surplus funds, which might strain your finances.

Opportunity Cost:

The funds used for part payments could have been invested elsewhere, potentially yielding higher returns.

Prepayment Penalties:

Some loans have prepayment penalties. Ensure your loan terms allow part payments without hefty charges.

Strategic Financial Planning
A Certified Financial Planner (CFP) can help you navigate these complexities. They can provide personalized advice based on your financial situation and goals.

Steps to Optimize Your Home Loan Repayment:
Assess Your Finances:

Evaluate your income, expenses, and financial goals to determine the feasibility of increasing EMI or making part payments.

Plan Part Payments:

Schedule part payments when you receive bonuses, incentives, or other windfalls. This can reduce your principal effectively without straining your regular budget.

Monitor Interest Rates:

Keep an eye on market interest rates. If they drop significantly, consider refinancing your loan for better terms.

Consult a CFP:

Engage with a Certified Financial Planner to create a comprehensive financial plan. They can provide insights into optimizing your loan repayment strategy.

Practical Steps for Part Payments
Making part payments can be straightforward. Here’s how to approach it:

Check Your Loan Agreement:

Review your loan agreement for any prepayment penalties or conditions.

Contact Your Bank:

Inform your bank about your intention to make a part payment. They will guide you through the process.

Documentation:

Ensure you complete any necessary paperwork required by the bank.

Track Your Loan Balance:

After making a part payment, monitor your loan balance and tenure. Confirm that the changes reflect accurately.

Conclusion
Reaching the EMI cap on your home loan is a standard precaution taken by banks to manage risk. While it can be frustrating, alternatives like part payments offer significant benefits. By strategically planning your repayments and engaging with a Certified Financial Planner, you can optimize your home loan management and achieve your financial goals efficiently.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in