Your money’s worth is a function of the inflation in the economy. That drives interest rates or the cost of money. If prices of goods and services rise rapidly, interest rates will increase in tandem.
If you are a regular reader of personal finance, you would know the monthly update of the consumer price inflation index or the CPI. However, if you are not into finance, you may want to look at the money you spent in the past month and compare it to the previous months. Inflation eats into the value of your money. For the same quantity of goods, you pay more every year.
As inflation remains stubbornly high, interest rates are expected to remain firm in tandem. Despite India becoming the fastest growing large economy in the world, persistently high inflation and interest rates would keep that growth in check. There are no signs of inflation trending down or interest rates peaking.
You will have to assess your loan portfolio if interest rates stay elevated. If you have opted for a floating rate loan, your loans are affected by the changes in the interest rates. You will receive regular communication from your lender about changes in the interest rates. Your equated monthly instalments or EMIs could go up, or the lender may send you a note suggesting an increase in your tenure or the number of balance instalments.
It is time for you to review your loan portfolio. The first check should be to determine the interest rate trend. A lead indicator is the 10-year government bond yield. That is typically the benchmark for the interest rates set by the Reserve Bank of India for banks to borrow money.
It is readily available online and updated daily. If month-on-month it moves upwards, interest rates are likely to stay firm or continue to rise. If it shows a declining trend, that could signify the peaking of interest rates and the inflation trend. The 10-year bond yield is influenced by the anticipation of the trend in inflation in an economy.
You can then assess the average interest rate you pay on all your loans. These could include your home, car, personal, and credit card borrowings. Retail loans are growing faster than other loans as banks are flush with money. They want you to borrow more as interest rates rise. You would receive new loan offers regularly if you have a good credit score. (Typically, 750 and above)
If you have surplus cash in the bank and credit card outstanding, you may want to pay them off first. The next in line is personal loans. Interest rates on them vary based on your credit score. You may want to consider prepaying the principal amount partially or fully.
Auto-loan agreements are typically watertight, and there is little headroom for you to make any changes. If you do not have a credit card or personal loan liabilities, you can pay off your auto loan as it is a short-term loan.
There could be a prepayment penalty on all loans.
If interest rates surge dramatically, you may want to consider your floating rate home loan for a rejig. The competition among banks is intense. There is a good chance that relatively newer banks may offer you a refinancing facility where you do a ‘balance transfer’ to the new bank of your existing home loan. It is the new bank buying the loan asset from your old bank. Banks facilitate that for their business needs. The new bank needs new customers, while the old bank may want to shore up capital by selling existing assets.
Your home loan is your cheapest financing option. If you do not have any other loans, you may want to wait before you rush to prepay that loan.
According to most local and global pundits, India’s economy is likely to grow steadily over the next decade. That means your stock market investments could generate a steady return too. Rushing to prepay the home loan by selling investments or stopping regular SIPs could hurt your finances. Talk to a professional advisor and work on a plan.
Don’t rush to prepay home loan
According to global pundits, India’s economy is likely to grow steadily over the next decade. That means your stock market investments could generate a steady return too. Rushing to prepay the home loan by selling investments or stopping regular SIPs could hurt your finances.
(The author is editor-in-chief at www.moneyminute.in)