The battle between the Goliath of inflation and the fearless David (read The RBI Governor) continues – the recent tenure extension of David does indicate the collective faith of our leaders in the monster-slayer! But all tenure extensions are not equally welcome, as we shall soon see. The number of rate hikes by the RBI in the last 18 months, have been too many and is nowadays looked upon with a sense of fear by all hapless souls including yours truly.
The wheels seem to be coming off at a rate much faster than Basanti could whip Dhanno to take her to safety! Am I getting too filmy here? I dare not. Let’s get real. Even as late as 2009 and 2010, banks were luring customers with teaser loans. Calculations reveal the following – If a borrower takes a loan at the rate of 8%, for a 20year tenure and if after 1 year the rate of interest increases to 9% then his loan repayment tenure would have ballooned to 292 months and his total repayments would go up by 22%. If this is followed by another rate hike of 1% another year later then the corresponding figures will be 418 months and 75% respectively! Shocked? Don’t be – because that is what has exactly happened to many customers. With every rate hike, the EMI should go up. In reality, this does not happen! Banks are ‘friendly’ enough to allow you to continue paying the same EMI.
Their response – it is logistically impossible to inform all customers immediately and start collecting higher EMIs. The Devil advocates – The Banks do not mind that extra income by way of interest, after all that is the objective of their business! The remedy is actually quite simple – keep a track of your loan by noting down the price of your loan. The reference rate (called by any name – PLR, BPLR, Base rate, whatever!) plus the spread (for HFCs and NBFCs it is negative as they are not subject to the latest RBI guidelines on lending rates which stipulates that the Base rate is the lowest rate that a Bank can offer a borrower – more of this trickery in another post).
Every month visit the homepage (website) of your lender and confirm if there are any changes (usually hike in today’s scenario) in the reference rate. If yes, immediately get in touch with the customer helpline and find out how you can get the EMI enhanced to reflect the rise in rates. Alternately, keep a copy of the loan amortization chart at the time of taking the loan and ensure that your projected loan outstanding amount at the beginning of every financial or calendar year is met (or bettered) by pre-payment of the difference. This may be due to hike in interest rates and/or under recoveries due to continuation in payment of same amount as EMIs. If you are a borrower with a loan taken before the Base Rate was introduced, chances are high that your existing home loan could be at a rate of interest of 14% or more. You must certainly explore the option of getting your loan re-priced by the same lender. If that does not work, seek a transfer of your loan to a new lender. Chances are high that you will not only bring down the outstanding tenure of your loan but also the EMI that you are paying currently.
A little pro-active behavior on your part can save you from substantial financial damages later!