Tips to manage EMIs effectively

Source:9 May 2010, 0512 hrs IST,ET Bureau

    

Many borrowers who opt for the floating rate of interest face financial stress whenever the rates move upwards. An increase in the interest rate translates into an increase in the EMIs. If the homeowner is under financial stress, home loan repayments become a nightmare. This is because EMIs are as high as 40 percent of a borrower's takehome income on an average.

Here are a few tips to manage EMIs effectively:

Prepay

Partial prepayment could reduce the high interest cost on that part of the loan. If you have any other asset or property that is not yielding anticipated returns, the option to sell it off and prepay the home loan exists. However, foreclosing a loan ahead of the tenure might attract a prepayment penalty of around two percent. If borrowers fear defaulting under the burden of increasing rates, prepaying is an option worth considering.

Negotiate

The borrower can try convincing the lender about his financial crunch and negotiate for a lower rate. You can work out a more comfortable repayment option with the lender.

Switch

If another lender offers very low rates compared to what you are paying towards your home loan, consider moving to the other lender. Home loan is a financial commitment that spans over long tenures, say 10-15 years. Weigh in the switching cost and penalties. Do your homework on the new lender. There is little the borrower can do if the new lender hikes the rate within two months of switching.

Manage finances

Chalk out a plan to manage your existing debts, regular monthly expenses and contingencies . Do not indulge in new debts and delay any new purchase plans. Spend judiciously and avoid splurging till you are out of debt.