In a surprise move, the Reserve Bank of India (RBI) increased the repo rate by 40 bps in May and 50 bps in June. Most home loans are taken on a floating rate basis so borrowers cannot escape the rising interest rates. The rise in interest rates will impact home loan borrowers the most as it is probably the biggest loan an individual takes in his lifetime. There are seven tricks to manage your home loan in such a way that it doesn’t hurt your monthly budget and keeps the cost under control.
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New borrowers can opt for hybrid loan
A hybrid loan is where the lender gives you loan with a fixed rate for the initial few years after which it starts charging the prevailing floating rate of interest. One can move to semi-fixed rates for first 3 years and later opt for floating rate of interest to ensure the interest rate fluctuation does not affect your loan tenor or EMI. One has to be mindful of the fact that the fixed rate on any such loan may be somewhat higher than the floating rate.
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Switch to new interest rate regime
If home loan was taken before October 2019 then it is very likely that the interest rate regimen is MCLR or Base Rate or BPLR. After October 2019, all new loans were shifted to the external benchmark rate but 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 interest rate is 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.
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Compare lenders’ rates
Check the interest rate being charged on home loan and compare with other lenders that are known to offer competitive rates. If the interest rate that you are paying is 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 HDFC and LICHFL, most of the housing finance companies typically charge a higher interest rate compared to banks. If the interest rate difference is 0.5% or more, shifting your loan to a new lender is advantageous.
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Bargain with improved credit score
If you have been disciplined in repayment, then it’s time reap the reward. Through home loan balance transfer, existing home loan borrowers with good credit profile should also explore the possibility of interest cost savings. Their improved credit profile may make them eligible for home loans at much lower rates from other lenders.
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Explore tenure extension
If you are finding it difficult to pay increased EMI, it is a good idea 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.
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Go for home saver option
Some home loans give the borrower the option of overdraft. 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 surplus and withdraw as per his financial requirements. Under this scheme, one only has to pay the interest part till one is comfortable in making the principal repayment. Although a home saver loan will increase the flexibility to manage loan with lesser repayment compulsion, the rate of interest on such loan is typically higher by 1-1.5%.
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Part prepayment can help
If the tenure of your home loan is already extended up to your retirement age, then there is hardly any scope for tenure extension. Only partial prepayment of your home loan will help. 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. (Text by Naveen Kumar)
