Double Trouble

Repo, CRR higher...loans dearer!

'Inflation', which has rightly become a cause of concern to the lenders, is consequently hitting the borrowers.

The inflation in India reached a 13-year high of 11.64 per cent today, which is highest since May 1995, when the inflation stood at 11.11 per cent. While inflation simply means that the value of currency as a means to buy a commodity decreases and makes things expensive...it has far reaching consequences.

As a measure to contain inflation, RBI hiked Cash Reserve Ratio (CRR) and repo rate on June 25. RBI has hiked the repo rate by 50 basis points to 8.50 per cent with immediate effect. The CRR has been increased by 50 basis points to 8.75 per cent in two stages. Repo rate is the rate at which banks borrow from RBI, while CRR is the slice of customer deposits that banks park with RBI.

As majority of the loans given by the bank are at a floating rate of interest which is linked to PLR, the borrower will certainly have to cough up more money for his EMI.

The cause and effect of the hike...

This hike is expected to hit the home loan interest rates, pushing it upwards, burning a bigger hole in a borrower's pocket. While commodities have become expensive with the fuel price hike adding to a consumer's list of woes, rate hike in home loans may hit even more hard.

Let's see what happens if the interest rate increases for a home loan of Rs. 30 lakh for 20 years for an individual earning Rs. 55, 000. If the loan was taken at an interest rate of 9% (floating), the EMI was 40.07 per cent of his income. His expenses are Rs. 15, 000, which is 27.27% of his income. This simply means that he could save about Rs. 13, 008-23.65 per cent of his income.

Now, with the interest rate increase to 11%, it translated into a hike in the EMI. The EMI increased to Rs. 30, 966-56.30% of his income. This will impact his savings as well as the expenditure. Given the inflation rate, the expenses will rise.

1) Firstly, he must keep an hawk's eye on the interest rate that his lender is charging to ensure that they are not charging him a higher rate than what they are giving to their new customers. This happens frequently and if the consumer finds this out, he should threaten to switch his loan to another lender if his existing lender refuses to give the same rate to him. Rates can be checked at a variety of sources including the rates comparator on www.apnaloan.com. Of course this option is available only to those consumers who have maintained an excellent track record of payment on their loans.

2) If the consumer has any surplus cash (after keeping a reserve for
contingencies) he can consider repayment of a portion of his loan so as to keep the EMI burden at an affordable level. In consultation with his personal financial advisor he can also consider liquidating some fixed income investments (such as fixed deposits)to repay a portion of his home loan

3) If none of these options are available and he can afford to pay higher EMIs from his monthly budget he should choose that option.

4) Be a vigilant consumer even if you have opted for a fixed rate of interest. As a matter of practice, assess the market's move and consider the costs and benefits of changing your decision. We recommend floating rate of interest as it is nearly 2% cheaper and even when interest rates rise, in the interim as long as they do not rise above the 1% differential; you are still a net gainer.

5) Lastly, should be the option of requesting the bank to increase the loan tenure.

None of the above options are easy but then these are not easy times but options are there which are like silver lining in the cloud.

And it is anybody's guess that for how long these times will last but it should be seen as an opportunity to change our habits of indulgence and do tight budgeting of our family budgets.