Home loan interest rates to rise steeply; 7 ways to manage your home loan EMIs

The time of historically low loan interest rates has come to an end, as the Reserve Bank of India in a surprise move hiked the repo rate by 40 bps in May. The RBI governor has in fact said in an interview said, “There will be some increase in the repo rate. By how much, I will not be able to tell now.” Rising interest rates will impact home loan borrowers the most as these are loan that come with the longest tenures and are probably the biggest loans an individual will take during his lifetime.

Most home loans are taken on a floating rate basis so borrowers cannot escape rising interest rates. No matter which interest rate regime (be it the external benchmark, base rate, BPLR or MCLR) you are servicing your loan under, your EMI is bound to increase.

Here are the seven ways you can manage/lower your home loan EMI burden.

Best time for new borrowers to get a hybrid loan

If you are a new borrower, then you need to take your time and evaluate a hybrid loan where the lender gives you the loan with a fixed rate for the initial few years after which it starts charging the prevailing floating rate of interest. “Move to semi-fixed rates of 3 years fixed and thereafter floating to ensure the interest rate movement does not affect your loan tenor or EMI,” says Malcolm Athaide, CEO-CoFounder, Agrim Housing Finance. However, do remember that the fixed rate on such a loan may be somewhat higher than the floating rate option.

Check if you are under old interest rate regime

If you took your home loan before October 2019, then it is likely that the interest rate regimen of your loan will MCLR or Base Rate or BPLR. While all new loans were shifted to the external benchmark rate after October 2019, the old loans were allowed to run under the existing system till the time borrowers applied for a change to the new regime. If your loan is old, then you must check its regime and the interest rate that you are paying with the lender. If it is much higher than the lender’s EBR then this may be the right time for you to switch to the EBR regime by paying a nominal fee.

Check other lenders and switch to a lower rate

You need to check the interest rate that is being charged on your home loan and compare with other lenders that are known to offer competitive rates. If you had taken your home loan at lowest rate from a very competitive lender and even after the rate hike it continues to be the lowest rate, then there will be no benefit in looking for another lender. However, if the interest rate that you are paying is much higher than other lenders despite a rate hike then it may make more sense now for you to switch to a new lender.

Other than the top HFCs like

and LICHFL, most of the housing finance companies typically charge a higher interest rate compared to banks. So, if your income profile and the property meet the criteria to be eligible for loan from top banks or HFCs it may be good time to attempt a transfer of loan. Typically, if the interest rate difference is 0.5% or more shifting your loan to a new lender is advantageous.

Bargain a lower rate with improved credit score

If you have been disciplined in repayment, then it may be the time to reap the reward for the same. “Existing home loan borrowers who have witnessed substantial improvements in their credit profile due to improved credit score, income or occupation profile since availing their home loan should also explore the possibility of interest cost savings through home loan balance transfer. Their improved credit profile may make them eligible for home loans at much lower rates from other lenders,” says Ratan Chaudhary – Head of Home Loans, Paisabazaar.com.

Go for tenure extension with the same lender

When you are with the lowest interest rate after the hike, and you find it difficult to pay increased EMIs after more rate hikes in future, then it may be worthwhile to ask your lender to increase the tenure of the loan and reduce your EMI. The increase of tenure is typically allowed by the lender till the retirement age of around 60-65 years. So, if you are 35 years old and taken a loan with a tenure of 20 years, you can very well get it increased to 25 years which will end at the time of your retirement age of 60 years.

Go for home saver option

There are also home loans which give you the option to have an overdraft kind of facility. “Home loan borrowers, both new and existing ones, having liquidity restraints can opt for the home saver option. Under this facility, an overdraft account is opened in the form of a current or savings account where the borrower can park his surpluses and withdraw from it as per his financial requirements,” says Chaudhary.

In such loans you need to only pay the interest part till you are comfortable in making the principal repayment. “The interest for the loan component is calculated after deducting the surpluses parked in the savings/current account from the outstanding home loan amount. Thus, home loan borrowers would derive the benefit of making prepayments without sacrificing their liquidity,” said Chaudhary.

Though a home saver loan will increase your flexibility to manage your loan with lesser repayment compulsion, however, the rate of interest on such loan is typically higher by 1-1.5%.

Part prepayment can help if tenure extension not feasible

If the tenure of your home loan is already extended up to your retirement age, then there is hardly any scope of tenure extension left. The only option left which can help you reduce your EMI is partial prepayment of your home loan. Since most of the retail home loans are taking on floating rate basis so there is no penalty for partial prepayments. If you have any investment such as fixed deposits which is giving you a post-tax return which is much less than the effective interest rate of your home loan after tax benefit consideration, then it may be worth prepaying your home loan and bring down your EMI.

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