The best way to cope up with rising interest rates on home loans is to make part pre-payments, says Satish Kumar, national credit manager, mortgages, ICICI Bank

The best way to manage your mortgage in a floating-rate regime and to keep your monthly payments under check is to budget for making regular part pre-payments over the tenure of your loan, Satish Kumar, national credit manager, mortgages, at ICICI Bank, said today. He was speaking at a workshop by Moneylife Foundation.

With the Reserve Bank of India (RBI) having hiked interest rates 12 times in 18 months, dealing with higher equated monthly instalments (EMIs) is a reality that all borrowers have to live with. The workshop aimed to inform and educate savers on how to borrow safely and navigate the interest rate storm.

While the government and policymakers advise lending institutions to extend loan tenures instead of raising EMIs, the borrowers face a dilemma over whether to keep their EMI constant or their tenure constant on their mortgage, for which the cost implications are significantly different. "If you have any long-term loan, plan to make part pre-payments," Mr Kumar said. The payment made will directly get adjusted with the outstanding principal resulting in a lower interest payout. Most banks do not charge any part pre-payment penalty.

Mr Kumar also suggested that borrowers who receive an income hike should start saving to make a lump-sum part pre-payment rather than going through the hassle of increasing the EMI. He also said that opting for an increase in EMI would be a better option as the interest burden is reduced. However, the decision would depend on the borrower's ability to service the higher EMI.

At the start of his presentation Mr Kumar cleared the common dilemma faced by new borrowers, whether it is a new property or resale, whether to buy now or later, and whether to go for a fixed interest rate or floating rate loan. While the choice of property depends on individual preference, Mr Kumar said people who have the funds in place should go ahead and buy the property if it is for personal use, since no one can really predict future interest rates.

He also said that most often people who end up in a debt trap get into trouble because of multiple borrowings. Having availed of a home loan, they also take personal loans and auto loans. For bankers, defaults on the smaller value loans are usually the first sign of a possible problem. Mr Kumar cautioned people against multiple borrowings, especially in times of rapid interest rate changes.

Mr Kumar also spoke on the obligation of joint owners and about the clearance of the property title. Joint applicants are equally liable to pay for the loan even if they are not joint owners of the property or are earning members. Usually, joint owners are unaware of their obligations.

Mr Kumar suggested individuals should do their own legwork to get the title of the property checked. Presently, 90% of the activity is manual. Hence one could take the services of a lawyer to check the property title.

Responding to a question on the insurance charged by banks along with the home loan, Mr Kumar said that though it was not compulsory it was essential to be adequately insured. If the loan is insured, the balance payment of the loan is cleared by the insurance company in case of death of the borrower. This would save the family and dependants additional financial stress.

Post the seminar, the participants had an opportunity to have their personal queries resolved in a one-to-one discussion with ICICI home finance experts.