Recently while flipping the pages of my newspaper I saw an article related to financial industry that deals with lending rates. That article was to lighten up our minds with the current changes going on. Many of us don’t know what a little increase in interest rates will bring an impact on our current home loan. Few years back a slight increase in policy rates done by RBI increased the Repo rates. However, this in turn Banks/ NBFC’s increased their MCLR even before the RBI increase the policy rates. The following write up explains you the current scenario, the tools or the steps one can use to tighten the out flow on their interest rates and to deal with the increasing burden of interest rates on your current home loan.
Impact on Pocket
For retail or small borrowers, the spike change in interest regime gives a clear signal to tighten the strings, as one more round of policy rate hike is expected in this financial year. The home loan borrowers have to bear an increased burden of interest rates. “Looking at the current situations of domestic and global developments, the interest rates are expected to become little difficult by the end of this financial year. This may lead to an increase in home loan interest rates by the end of this year,” says Gaurav Gaur, MD, Mudra Homes.
If we consider the perspective of current home loan borrowers, however, the interest cost is going to increase as of now and also they have to frame new strategies shield the impact. Though, there is no thumb rule to control the external factors like these, the following steps can help you to minimize the effect.
Retain the same Tenor and Increase the EMI
The borrowers have to adapt a new approach to reduce the impact of increasing interest rates. In such scenarios most Banks/ NBFC’s increase the tenor instead of increasing the EMI’s. The borrower may not feel the impact at the same moment but the fact is that your interest will ascend as the tenor increases. “The borrowers should discuss with their lender to increase their EMI’s and reduce the tenor. This will be quite favorable for the borrowers,” explains Akhil Jain, cofounder of Mudra Homes, a loan consultancy.
Compare before you switch
We as a borrower find it as the best option – switch the lender to avail the best interest rates and negotiate other terms and conditions. Before you switch your lender, who offers the better interest rates, look for the resulting savings. It is also important as the Banks/ NBFCs are not allowed to impose any foreclosure charges on a loan with a floating rate of interest, though, it also depends on your balance repayment tenor. If you have recently borrowed and the interest rates shift just by 0.25%, the tedious process to switch to another lender may not be worth.
Older borrowers can always look for better options and explore after the cost benefit analysis even if the difference is narrower. But if you are almost at end of the completion of the repayment tenor then also bearing a hassle does not make any sense even if the shift is more than 0.25% as it may not justify the switch.
As a marketing strategy and to attract new customers few lenders normally keep their interest rate low but the borrowers should not forget the subordinate expenses. The financial experts of Mudra Home suggest switching only if the difference is of more than 100 basis points.
Making a part prepayment can be an effective measure to reduce the interest burden. Paying off your loan by making a part prepayment can yield you more than what you gain from investing in deposits or investments, says Atul Pareek, a financial expert from Mudra Homes.
Conduct comprehensive danger
Finally, don’t let the interest rate hikes decide your judgment of borrowing a fresh loan or opting for a balance transfer. Be careful of the mistakes that most of the borrowers tend to make whether you are a new home loan borrower, first time borrower or an existing borrower. Availing a fixed rate loan can be a backdrop to a recent rate hike. Even a small hike in current rates, the overall outlook for interest rates seems to be warm hearted. Refinancing will not prove to be a good option for those borrowers who opted for a fixed rate loan as fixed rates are subjected to foreclosure charges, making it a costly affair.
If you are planning to purchase an under construction property than finding a lender whose terms and conditions protect your interest will be beneficial for you. You can put a condition to pay the builder as per the stages of the construction. Full payment of the agreement value is not advisable for the under construction properties. You can also opt for a loan according to your repayment capacity considering your income, expenses and commitments instead of what Bank/NBFC wants to approve. After all, it is your lifetime commitment. Restricting the EMI to 30%-40% of the post tax income will be anytime beneficial for you in future.