Interest rates for home loans have risen sharply in the last few weeks; First such hike since the Corona pandemic, partly due to the Ukrainian war and the sky-rocketing crude oil prices. This means that if you have a home loan, your interest rate will increase. Rising interest rates are likely to make it harder for aspiring home buyers to get a loan, especially those with a small salary. But there are ways to manage your EMIs and still save for a home.
The RBI recently increased the repo rate by 90 basis points, causing interest rates on home loans to rise considerably. Experts believe this is just the beginning of a wave of rate hikes across the board.
The most effective way to get out of debt faster is to devise a systematic approach to repaying your debt. You will achieve your financial goals faster if you are consistent and regular with your repayments. You can also use partial prepayments to speed up the repayment of your loan. The only way to achieve your financial goals is to be determined and have a plan.
Table of Contents
Here Are 7 Steps To Help You Manage Your Home Loan Better –
#1 Opt For Hybrid Loans
Banks often offer hybrid loans to new borrowers who are looking to avoid ballooning interest payments. Hybrid loans combine the safety and conveniences of a fixed-rate loan with the flexibility of an adjustable-rate loan.
Hybrid loans start with a fixed rate of interest for a few initial years, say three years, and later become floating rate. This allows you to plan your repayment strategy while keeping the changing interest rate environment in mind.
Hybrid home loans are an excellent choice for those who want to pay off their loan faster without worrying much about their interest burden. The borrower should be able to afford to repay the loan without difficulty after a period of time. For a hybrid loan to make sense, the interest rate charged should be lower than the standard variable rate loan.
#2 Check To See If Your Loan Is Still Under The Old Interest Rate Regime
If you obtained your home loan prior to October 2019, the interest rate regime of your loan will most likely be MCLR, Base Rate, or BPLR. While all new loans were moved to the external benchmark rate after October 2019, existing loans were allowed to run under the old system until borrowers applied for a change to the new regime. If your loan is older, you should review its terms and the interest rate you are paying to the lender. If it is significantly higher than the lender’s EBR, now may be the time to switch to the EBR regime for a nominal fee.
#3 Go For A Home Loan Balance Transfer To A Different Lender
A home loan balance transfer is a great way to get a lower interest rate while paying less in interest. When you transfer your home loan balance from one lender to another, you’re usually able to transfer your debt at a lower interest rate than what you paid to your original lender, sometimes by as much as 1%.
You should check the interest rate on your home loan and compare it to other lenders who are known to offer competitive rates. If you took your home loan at the lowest rate from a very competitive lender and it remains the lowest rate even after the rate hike, there is no point in looking for another lender. However, if your interest rate is significantly higher than that of other lenders despite a rate increase, switching to a new lender may now make more sense.
#4 Improve Your Credit Score And Get A Lower Interest Rate
One of the easiest ways to save on your home loan is to improve your credit score. A higher credit score means you can get lower interest rates on your home loans. In addition to improving your credit score, you can also take steps to make sure your debt is paid on time, which can also improve your credit score.
The best way to improve your credit score is to pay your bills on time and in full. This will not only improve your credit score but also make it more difficult for potential lenders to find any missed payments on your account. Another way to improve your credit score is to take advantage of various discounts and offers on your credit cards. By using the card responsibly, you can build a good credit history and improve your credit score even more.
#5 Request To Extend The Tenure Of Your Current Home Loan
You can apply to extend your home loan tenure by calling your lender and requesting an extension.
If you are not up to date with your home loan payments, or feel that your mortgage payments will be difficult to catch up on with the new interest schedule, you can ask your lender to extend your home loan tenure for a short time. This way, you can continue paying the same EMI amount for a few more months to pay off the home loan. This will give you some respite for the current time being while you try to settle your financial woes.
#6 Make Partial Payments Whenever You Have Additional Amount
Partial payments will help you reduce your home loan interest burden, lowering your monthly repayments and allowing you to save more. Put any bonus, incentive, or FD maturity money into your home loan account. This allows you to pay off your mortgage in smaller installments.
Even regular part-payments of Rs.10,000 can have a significant impact on your total outstanding loan amount. When you make regular part-payments on your home loan, the interest portion is greatly reduced. Even if interest rates rise on a regular basis, the effect can be mitigated significantly.
#7 A Systemic Approach Towards Home Loan Repayments
Home loan repayment requires nothing less than careful financial planning. The ultimate goal is to pay off the principal and interest in smaller monthly installments than you do now. A planned repayment plan allows you to know how much you can afford to pay each month and allows you to better manage your money. It entails sticking to your goals and meeting them on time.
Interest rates are expected to rise by 200 basis points under the current economic scenario. Assume a 100 basis point increase in interest rates. In such a case, new borrowers may wish to consider reducing the loan by prepaying 5% of the outstanding loan amount once per loan year.
Servicing a home loan necessitates some financial prudence. When online shopping and food delivery consume your monthly savings, a few years of self-control and strict spending habits are required.
And, in the case of home loans, this means being consistent with your repayment schedule and sticking to it even when times are tough. Even if it means making sacrifices, this is true. For example, even if you choose to pay Rs 50,000 more in EMIs rather than Rs 10,000 more in partial payments, you may have to reduce certain expenses. However, in the long run, this will help you save significantly more.
The best way to pay off your mortgage is to save enough money to cover your EMIs and other regular payments. If you plan carefully, rising interest rates will have little impact on your ability to repay your mortgage.