- Date : 03/03/2023
- Read: 4 mins
Have you taken home loan and worried about increasing interest rates? If yes, this article suggests ways to manage finances.
The RBI's recent repo rate hikes have caused a major disruption in the real estate market. Home buyers, who had taken home loans, have been heavily impacted by the high-interest rates. This has resulted in home loan borrowers feeling frustrated and paying more than they had expected. With the RBI expected to continue to raise rates to combat rising inflation, the situation is likely to be challenging for recent home buyers. This article discusses strategies to mitigate the effects of rising interest rates and includes the following strategies:
- Change the tenure of the loan or pay higher EMI
- Partial or full prepayment
- Transfer home loans from one lender to another
- Fixed interest rate vs Floating interest rate
Given below are a few strategies which can help home loan borrowers reduce the impact of high-interest rates on their EMI:
1. Change the tenure of the loan or pay a higher EMI
When interest rates increase, home loan borrowers can either pay higher EMIs over the same loan tenure or keep their EMIs the same but with a longer loan tenure. This can be a difficult decision for borrowers, as the higher EMIs could burden their finances; however, a longer loan tenure could mean more money paid in interest over the life of the loan. Ultimately, it's up to the borrower to decide which option is the most suitable for them.
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2. Partial or full prepayment of the loan amount
Prepayment is paying off a loan ahead of schedule with a lump sum amount. It can help reduce the total interest paid over the loan term and potentially lower monthly payments. This option is available for those with a lump sum of money and can provide financial benefits for those who can afford it. Considering the potential loss of tax benefits before choosing to prepay a loan is important. Section 24 of the IT Act permits a deduction of Rs 2 lakh for interest payments, in addition to the 80C deduction limit of Rs 1.5 lakh on principal payments.
Whether to prepay a home loan or invest the money elsewhere is a personal decision, as home loans are usually low-cost financing options, and investing may yield more returns.
3. Transferring home loans from one lender to another?
A loan borrower who discovers they are paying a higher interest rate on their home loan than the market rate may benefit from exploring refinancing options. Refinancing can secure a lower interest rate and potentially lower monthly payments, reducing the overall cost of the loan and potentially shortening the loan term.
When refinancing a loan, it is important to carefully evaluate the interest rate and the benchmark it is linked to, to assess the long-term impact. Selecting a new financer may involve additional steps such as documentation, obtaining documents from the existing financer, and paying processing fees, valuation fees, and administration fees. To avoid additional costs and ensure a smooth refinancing process, it is important to research and compares different lenders' terms and fees before making a decision.
Given below is a list of banks/ NBFCs offering low/ affordable interest home loans (as of 1st February 2023)
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4. Fixed interest rate vs Floating interest rate
Many homeowners may consider switching to fixed home loan rates due to rising interest rates. Fixed home loan rates provide stability and predictability, as the interest rate is constant throughout the loan term, whereas floating interest rates are subject to market fluctuations. Individuals should check with their banks whether this option is available. In deciding which option to choose, one must consider one's financial situation, risk tolerance and long-term objectives. Seeking advice from a financial advisor or loan specialist may help select the best option for an individual's needs.
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The current increase in home loan interest rates has been difficult for many homebuyers. Fortunately, there are strategies available to help reduce the impact and potentially lower monthly payments, such as changing the loan tenure, prepayment of the loan, transferring the loan to another lender and opting for a fixed or floating interest rate. Knowing how to assess and compare the various options is essential in finding the best solution for one's needs.