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08 JULY, 2022
Every time the Reserve Bank of India (RBI) increases interest rates, the home loan interest rate also rises. Last month, RBI increased the repo rate for the first time in years and then again earlier this month. First, by 40 basis points and then by 50 basis points. Each rate hike by RBI triggers the home loan interest rate to increase too. As inflation is continuing to surge, more rate hikes are expected. Some experts believe that the rate could rise by as much as 200 basis points over the next two years.
So, what do you do in this rising interest rate scenario? You can go through your options and see what steps you can take to ensure that your overall interest outgo does not increase. At the same time, you may also want to see to it that your Equated Monthly Instalment (EMI) burden does not increase and does not make it harder to meet your debt obligation. Here’s your way around it:
1. Undertake part prepayment strategically
When you think of prepaying your loan, you may think of prepaying a major chunk in one go. This is not always a wise option. Unless you have idle funds or substantial money parked in low-return investments, you will have to prepay your loan in a more balanced manner. You could consider prepaying 5% of the loan balance every year. Not only does this make your EMI payments more effective but it also doesn’t force you to take away funds from your other financial goals.
2. Consider home loan refinancing
Another thing to do amidst rising housing loan rates is to conduct a cost-benefit analysis of home loan refinancing or balance transfer. If there are other lenders who are offering you a lower home loan interest rate than your current lender and if the cost of the loan transfer such as the processing fees does not outweigh the money saved, you should go for it. It’s important to consider just how much interest you would save over the remaining tenure if you opt for the balance transfer and if it is substantially more than the costs you would be incurring.
3. Increase the loan tenure
This is a step you should consider if you are feeling financially constrained and cannot afford to prepay your loan or increase your EMIs. When home loan interest rates increase, instead of increasing your EMI amount, you can choose to increase your loan tenure. By doing so, you will not feel the burden of an increased EMI or the real-time burden of the rising housing loan rate. However, in the long term, your cost of borrowing would increase as this would translate to a higher interest outgo.
You should consider these options and see what works best for you because rising home loan rates will continue to be a reality as long as inflation is not curbed.
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