While the EMI might be eating into your income, a rise in home loan rates only adds to the outflow of funds from your personal finance. Fluctuations in interest rates of home loans is difficult to predict. It might even affect your savings or your retirement corpus. As a home loan borrower, it’s challenging to manage such fluctuations as it could impact your living standards. A hike in the interest rate means higher EMI or longer tenure. But if you take some smart decisions, you’ll be able to save a significant amount. Given the scenario, you need to devise effective strategies to cushion the impact of a rise in interest rates. While there are no short cuts to reduce the impact of higher interest rate, it’s better to put a tight lid on your interest outgo and minimise the impact.
Let’s look at some of the ways we can deal with a rise in home loan interest rates.
Increase EMI Amount and Retain Tenure
You need to tweak your approach to reduce the impact of rising interest rates. Most of the time lenders or banks, by default, extend the tenure instead of increasing your EMI amount. You might not feel the impact if the EMI remains intact, however, it will increase your interest burden as tenure increases.
By increasing the EMI and not the tenure, a home loan borrower is the most benefitted and not the lender. If possible, you can also increase the home loan EMI beyond what’s required to substantially reduce the interest outgo over the tenure.
Part-Payment of the Home Loan
One of the most effective approaches is making a part-payment of the home loan. Instead of investing your money on a low-return investment product, part-payment allows you to stop the interest outgo as well as the total amount payable to the bank apart from the principal amount. Most lenders do not charge a pre-closure fee; however, you need to check the terms and conditions of your home loan to understand if there are any charges towards part-payment of the loan.
Home Loan Balance Transfer
Look for an alternative lender who is offering a lower home loan interest rates or lower tenure to finance your home. Usually, lenders offer lower interest rates if you re-finance a loan. Some of these lenders, in order to attract new customers, will offer lower interest rates on loans.
That said, you should be aware of incidental charges such as processing fee, annual review, inspection and documentation charges which may be charged to transfer your home loan from one lender to another. It’s advisable to switch to another lender if the offer lets your home loan interest rate decline by at least 1 percentage point.
Move to a Fixed Interest Rate Home Loan
If you believe that home loan interest rates are bound to increase in the future and if your home loan is charged under the floating interest rate, move to a fixed interest rate loan. However, the interest rate is high on fixed rate and lower on floating rates.
If the remaining tenure is lower than 10 years, it’s advisable to change from a floating interest rate to a fixed rate. It may be noted that bank may charge you a fee to move from two different types of home loan interest rates.
Buy a Home Now
Several experts believe that by postponing your home buying decision, could impact the total amount that you’ll have to pay. Inflation keeps fluctuating and erodes the value of your money. Hence, if you delay buying a home, you may end up paying more in the future. Also, a property tends to appreciate over time, so what you pay today could possibly become more tomorrow.
In conclusion, don’t let the interest rate increase change your judgement while taking a new home loan or choosing to balance transfer. Whether you’re a new borrower, or a first-time borrower or choosing to balance transfer your home loan, beware of mistakes that borrowers usually tend to commit.
While reducing tenure and increasing EMIs could be a step forward, it’s recommended that you opt for longer tenures at the time of taking the home loan. Many of us tend to choose shorter payment periods and higher EMIs. However, this puts pressure on you in meeting the EMI if the expected rise in your income does not happen. It’s better to choose a permissible longer tenure and an affordable EMI.