October 2, 2022
Home Loan

Home Loan

The recent rise in home loan interest rates has been a cause for concern among many home loan borrowers. With three repo rate hikes in the past four months, the current repo rate now stands at 5.40%. Since banks and financial institutions pass on these rate hikes to customers, it leads to a sharp rise in borrowing costs. Hence, those who wish to avail housing loans now, have to shell out much more for their monthly EMIs making home loans dearer. 

How to Manage a Higher Interest Rate 

A repo rate hike translates into a longer tenor or higher EMIs for home loan borrowers. When the interest rate on home loan rises, lenders automatically extend the loan tenor in such a manner that the EMIs remain unchanged; whereas, the number of repayment years increase proportionately. 

This can be explained through the following example:

An existing home loan borrower with an outstanding principal of Rs. 50 lakh and tenor of 20 years at 7.65% p.a. interest may presently experience a hike in the interest rate at 8.15% p.a. This could stretch his/her home loan duration further by another two years. In addition to the increased tenor, the borrower has to bear the brunt of higher interest outgo, which works out to be Rs. 10.14 lakh in this case. 

Borrowers also have another alternative, wherein they pay a larger EMI while continuing the ongoing repayment schedule. But it is not a default option, so one has to put in a request with the lender.

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The example given below shows how this can affect your home loan:

A home loan of Rs. 50 lakh for a tenor of 20 years incurs a revised EMI of Rs. 42,289 compared to the previous EMI of Rs. 40,739. It is a direct consequence of the latest repo rate hike of 5th August 2022, which could increase the loan interest rates by 50 basis points. 

However, before you opt for a higher EMI outgo, ensure that your finances permit you to do so; taking into account your regular expenses and exigencies until the end of the loan tenor.

Higher EMI or Longer Tenor – Which Is a Better Option?

If one has budgetary constraints, it might be advisable to increase the loan tenor without disturbing your savings or spending ability. But in case, you have surplus funds and yet you want to extend the tenor; you can utilise the extra money to repay another loan or invest it for higher returns, which may balance out the home loan interest burden. 

How to Reduce Your Home Loan Interest Rate

At present, the lowest interest rate on a home loan starts from 6.65% p.a. and could go up to 13.00% p.a., depending on the home loan provider and their home loan eligibility criteria. Nevertheless, despite the fluctuating market conditions, one can manage the home loan interest rates to a great extent by keeping in mind a few crucial details mentioned below:

Choose a Shorter Tenor

A home loan tenor is one of the primary factors that determines the payable loan interest. Although, longer tenors result in a reasonable EMI pay-out; a shorter tenor entails higher monthly instalments. Yet, the latter can help save on the interest outgo, which may be a substantial sum.

Prepay Your Home Loan

Whenever you have excess funds available, try to use it for pre-paying home loans from time to time. Frequent pre-payments bring down the principal amount, which reduces the total interest. Lenders don’t charge pre-payment or foreclosure fees on floating rate home loans. Even in the case of fixed interest rate loans, lenders may levy nil to nominal charges for the same. So check these costs with the lender before planning your pre-payments.       

Compare Interest Rates

Researching various loan products and comparing the home loan interest rates is imperative when choosing the right home loan. Apart from the lender portals, there are several third-party websites that can provide a ready reckoner of the rates and other charges levied by different lenders. One can even use an online home loan calculator to assess the affordability of each loan deal. Other than that, you can also look out for special interest rates that are usually given as festive offers.

Home Loan Balance Transfer

If you find the interest rates charged by your lender to be on the higher side, you can choose to transfer the remaining principal amount to another lender, who is willing to tender lower interest rates and more convenient terms. 

Pay a Higher Down Payment

Most banks and financial institutions lend 75% to 90% of the total value of a property. This means that you are required to arrange 10% to 25% of the remaining cost of the house on your own towards the down payment. Remember, instead of paying the least amount, it is better to contribute a heavy sum. A higher down payment will lower the principal amount, thereby reducing the home loan interest.

Maintain a Good Credit/CIBIL Score

Lenders always prefer customers with good credit history. They often extend preferential rates to those having a flawless credit record. So if you maintain a good credit/CIBIL score of 750 or above, it proves that you are a responsible borrower, who can handle credit repayments on time. A good CIBIL score for home loans will enable you to garner lower interest rates. Otherwise, you could negotiate with the lender provided you have a healthy business relationship with them. 

Increase Your Payable EMI 

Sometimes, lenders may permit you to revise your instalments annually. If you have secured a promotion or switched jobs for a better salary, you can consider paying higher EMIs to reduce the loan tenor and pay off your home loan earlier. A shorter tenor brings down the overall interest on your loan making it considerably cost-effective.  

Summing Up

Following the pointers mentioned herein can help you fetch the lowest home loan interest rates along with favorable terms. Once you select the lender, go through all the relevant details like their home loan eligibility requirements and documentation. This will enable faster processing of your loan application; and the journey to receiving your home loan sanction letter and loan disbursal can be quick and comfortable. 

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