EASING THE BURDEN
Beyond Market|December 2022
Prepayment is an ideal way to reduce your housing loan interest strain
EASING THE BURDEN

The interest rate cycle has flipped. The top priority of central banks world over has been to control inflation. India is no different from the rest of the world. The nation’s apex bank, the Reserve Bank of India (RBI), has been tightening interest rates in order to tame inflation.

The Reserve Bank has hiked the key short-term lending rate (repo) by 190 basis points in four tranches since May to contain inflation.

There are enough signs indicating that inflation may slow down in 2023 on the back of high base effect and falling oil prices due to recessionary fears.

Yet, the RBI is unlikely to turn dovish until inflation is brought within the acceptable range of 2% to 4%. This means that high-interest rates are here to stay in the medium term.

The direct fallout of rising repo rates is the increase in the interest portion of EMIs on floating-rate housing loans. Hence, the question arises: can something be done to alleviate the burden of increasing EMIs caused by rising interest rates?

The easiest and the simplest option would be to prepay the housing loan to the extent possible and reduce the interest outflow. This may not be the best thing to do in fixed-rate home loans because of the prepayment penalty that may be levied on the loan by the lender.

PREPAYMENT OF A HOUSING LOAN

Prepayment is an option to repay a part of the principal during the tenure of the home loan or pay off the loan in full (also termed as foreclosure) before the tenure of the home loan ends.

Since, the prepayment goes towards principal reduction, any part prepayment will lead to a reduction in the EMI as the quantum of interest to be paid will fall on the back of a drop in the outstanding loan amount.

This story is from the December 2022 edition of Beyond Market.

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This story is from the December 2022 edition of Beyond Market.

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