Monday, 5 November 2018

How to deal with increase in home loan interest rates?

A home loan is a long term financial commitment as its tenure extends from 10 to 25 years. There are a lot of external factors like inflation, crude oil prices, rupee value and global economic condition that affect the rate of interests. If you have a home loan in your portfolio and if you have chosen a floating interest rate then these external factors will have an indirect effect on your personal finances.
If RBI decides to hike the rates and the bank with which you have a loan decides to pass on the hike to its existing customers then you need to devise a strategy to deal with this change. There are several ways in which you can deal with the impact of rise in the interest rates.
Increase the EMI amount- Home loans EMIs usually take up a substantial percentage of a family budget. A hike in the interest rate will change the total cost of the loan. Instead of extending the loan tenure if you can accommodate an extra amount in the budget (without affecting your other financial goals), then it is a good decision to increase the EMI amount that you pay every month. Sometimes it is much better to increase the EMI amount than to invest your savings. If the rate of interest you are paying on home loan is higher than what you would get as return on investing the savings, then increasing the EMI amount is a better option.
Increase the tenure- There may be situations where you do not feel that you can budget an extra amount of EMI. In those cases increasing the tenure of the loan, while keeping the EMI amount same can be the only option. However, if you do so, the cost of the loan in the form of interest outgo increases.
Balance transfer- Another way of dealing with the situation is to shift to a different lender who is charging a lower rate of interest. Tell your existing lender about your intentions. Most banks do not wish to lose their old customers, and try to accommodate their requirements in order to retain them in this cut throat competition. If you have paid attention to the factors that affect CIBIL score calculation, then you will have a high credit score. Use this weapon and try to negotiate with them so as to avoid the hassle involved in switching to another bank. If you do plan to switch you must first compare the cost involved with the savings that you will derive, to understand whether it is wise to do so or not.
Partial prepayment of loan – If one has some surplus funds or if one is expecting a bonus in the near future, then those can be used to make a partial pre-payment of home loan. If there is no prepayment penalty, it is a good way to bring down the principal outstanding amount. If the borrower keeps the EMI amount same, then prepayments will help him in servicing the loan faster than the agreed upon tenure. It will also reduce the overall cost of the loan. Prepayments however should not be done at the cost of saving for emergencies. One must not sacrifice the corpus created to meet short term goals, otherwise one would need to take loans at a high rate of interest in order to meet them.
Switch to fixed rate home loan- A fixed interest rate definitely provides more stability to your financial life. If adjustments to floating interest changes are difficult for you to handle, you may think of switching to a fixed rate home loan. You can explore this option depending upon the outstanding loan amount and remaining tenure of loan that you have. But remember fixed rate is usually higher than the current floating rate, so you will need to do a cost benefit analysis to decide whether it is really in your interest to make a switch. If you are close to final repayment date, then it may not be justified to make the switch.
Before deciding on a particular strategy analyse every aspect of your financial portfolio. You should adopt the measure that best suits your budget and financial situation. Remember, you do not want to get into additional debts at a higher rate of interest, just to save on interest cost of home loan.