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07 JULY, 2022
The Reserve Bank of India (RBI) raised the repo rate twice, first by 40 basis points in May 2022 and then by 50 basis points in June 2022, ending the period of historically low housing loan interest rates. More rate hikes are expected as India’s inflation continues to surge. This means that the housing loan interest rates that have been increasing now could continue to rise further. In such a macroeconomic scenario where you have no control, you can look at your personal finances and see how to best manage the impact. An increased housing loan interest would essentially mean that your total interest outgo would increase, increasing your cost of borrowing. Here are a few things you can do to deal with the increasing home loan interest rates:
1. Consider a balance transfer
When you opt for a home loan balance transfer, you essentially transfer your home loan from your existing lender to a new lender who is offering a lower housing loan interest rate. Depending on when you took out your loan and at what rate, there may be a possibility to currently find a lender who is offering a better home loan interest rate and terms.
2. Look at your credit score
You should check your credit score and see if there has been a significant improvement there. If yes, you can use that to leverage a better home loan interest rate either with your existing lender or a new lender. This applies even when you have had a significant increase in your income and your overall financial profile is a lot stronger than when you had first applied for the home loan.
3. Prioritise part prepayment
Another way you can try to lower your cost of borrowing is by considering part prepayment of your home loan. If you have money invested in avenues such as fixed deposits, mutual funds, etc., you should look at using that to prepay a part of your home loan to lower the overall interest outgo. Paying off high-interest debt should always be a priority when you are financially planning.
4.Opt for a tenure extension
If you do not have the funds to partially prepay your home loan, you can consider opting for a tenure extension. This will not help reduce the interest outgo, it may in fact increase it. However, extending your home loan tenure will reduce your Equated Monthly Instalment (EMI) burden. A reduced EMI may make it easier for you to meet all your financial obligations while comfortably paying your EMIs.
In the current rising interest rate scenario, it’s also important that you focus on a few other aspects of financial planning. For instance, increase your emergency fund so that in case of job loss or income reduction, you don’t default on your home loan EMIs until you figure out your next step. Exiting from low-return investments to prepay your loan partially, looking into a balance transfer after a cost-benefit analysis, assessing your financial profile, and more are steps you can take right now.
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