Home loan is a long-term commitment. And, it can be tricky if the loan interest rates keep fluctuating. Hence, it is imperative to understand your financial portfolio and re-organize it to handle any debt burden caused by hike in interest rates.
Here, go through some ways to deal with the housing loan interest rate hikes.
- Balance transfer
You can apply for a home loan balance transfer to benefit from lower interest rates and save on the interest cost. However, it is advisable to do a cost-benefit analysis while making the switch. You might be able to save money on switching the loan. But, it should be done in the initial years when the interest outgo is higher. Having said that, you must also calculate the cost of the balance transfer compared to the expected savings. Experts opine that you should transfer your loan only when there is a difference of at least 100 base points.
- Prepay the loan
One of the best ways to reduce the interest outgo is loan pre-payment. If you anticipate more hikes in the interest rates in future, it would be best to pre-pay your loan. You can use a bonus or any monetary gifts for the same. You can also use passive sources of income like rental income to repay the loan.
Though it is not advisable to break your emergency fund to repay the loan, you can divert your investments to do part-payment of the loan. It could be better to use the funds to partly pay the loan than investing in low yield investments. You might be able to save more money on the interest outgo than the interest income you forgo.
- Opt for a higher EMI and not tenure
While restructuring your loan, most lenders opt to increase the tenure. Though it reduces the EMI amount, it increases the interest outgo, hardly providing you with any benefit in totality. Instead, when the interest rates increase, ask your lender to increase the EMI as per your affordability. This will help you reduce the tenure and consequently your interest outgo too.
- Choose your loan carefully
While availing a home loan during interest rate hikes, stay clear of pitfalls, such as, choosing a lender who offers the lowest rates. You must also consider their charges and fees to ensure that you choose the right lender. Even if you expect increase in rates, it would be better to opt for floating interest rates and not fixed rates. With floating interest rates, you need not pay prepayment charges.
Hike in home loan interest rates could put pressure on your finances. It is, therefore, imperative that you borrow as per your repayment capacity, despite the lender approving a higher amount. Also, you should assess your financial comfort, income, total expense and accordingly choose a tenure that keeps your EMI below 30-40% of the post-tax income.