Most home loans are contracted at variable rates so that borrowers cannot escape rising interest rates. Regardless of the interest rate regime (whether external benchmark rate, base rate, BPLR or MCLR) under which you manage your loan, your EMI is bound to increase.
Here are seven ways you can manage/reduce your EMI home loan burden.
Best time for new borrowers to get a hybrid loan
If you are a new borrower, you should take your time and evaluate a hybrid loan where the lender gives you the loan at a fixed rate for the first few years, after which they start charging the prevailing variable interest rate. “Move to semi-fixed 3-year fixed and then floating rates to ensure interest rate movement does not affect your loan term or EMI,” says Malcolm Athaide, CEO-Co-Founder of Agrim HousingFinance. However, remember that the fixed rate on such a loan may be a bit higher than the variable rate option.
Check if you are under the old interest rate regime
If you took out your home loan before October 2019, it is likely that the interest rate scheme for your loan will be MCLR or base rate or BPLR. While all new loans were transferred to the external benchmark rate after October 2019, old loans were allowed to operate under the existing system until borrowers requested a change to the new regime. If your loan is old, then you need to check its scheme and the interest rate you are paying with the lender. If it is much higher than the lender’s EBR, it may be a good time for you to switch to the EBR regime by paying a nominal fee.
Check other lenders and switch to a lower rate
You should check the interest rate that is charged on your home loan and compare it with other lenders known to offer competitive rates. If you had taken out your lowest rate home loan with a very competitive lender and even after the rate hike it continues to be the lowest rate, there will be no benefit in looking for another lender. However, if the interest rate you are paying is much higher than other lenders despite rising rates, it may make more sense now for you to switch to a new lender.
Besides the best HFCs like
and LICHFL, most housing finance companies generally charge a higher interest rate than banks. So, if your income profile and the property meet the eligibility criteria for a loan from top banks or HFCs, it might be time to attempt a loan transfer. Generally, if the interest rate difference is 0.5% or more, it is beneficial to transfer your loan to a new lender.
Negotiate a lower rate with an improved credit score
If you’ve been disciplined in paying back, maybe it’s time to reap the rewards. “Existing home loan borrowers who have seen substantial improvements in their credit profile due to improvements in their credit rating, income, or employment profile since using their home loan should also explore the opportunity to save on interest charges through home loan balance transfer Their improved credit profile can make them eligible for home loans at much lower rates from other lenders,” says Ratan Chaudhary – Head of home loans, Paisabazaar.com.
Opt for a term extension with the same lender
When you have the lowest interest rate after the hike and are struggling to pay increased EMIs after further rate hikes in the future, it may be worth asking your lender to raise the loan term and reduce your EMI. Increasing tenure is generally permitted by the lender until the retirement age of around 60 to 65 years old. Thus, if you are 35 years old and have taken out a loan with a duration of 20 years, you can very well increase it to 25 years which will end when you retire at 60 years old.
Opt for the home saver option
There are also home loans that give you the option of having a sort of overdraft facility. “New and existing home loan borrowers with cash constraints can opt for the home savings option. Under this facility, an overdraft account is opened in the form of a checking or savings account where the borrower can park their surpluses and withdraw from them according to their financial needs,” says Chaudhary.
In such loans, you only have to pay the interest portion until you are comfortable making the principal repayment. “The interest on the loan component is calculated after deducting the surpluses parked in the savings/current account from the outstanding amount of the home loan. Thus, home loan borrowers would have the advantage of making early repayments without sacrificing their liquidity,” Chaudhary said.
Although a home savings loan will increase your flexibility to manage your loan with less repayment stress, however, the interest rate on this loan is usually 1-1.5% higher.
Partial prepayment can help if term extension is not possible
If the duration of your home loan has already been extended until your retirement age, there is practically no possibility of extending the duration. The only remaining option that can help you reduce your EMI is partial prepayment of your home loan. Since most retail home loans are variable rate, there is therefore no penalty for partial prepayments. If you have an investment such as term deposits that gives you an after-tax return that is much lower than the effective interest rate on your home loan after tax benefits have been deducted, it may be worth paying off your home loan early and reducing your NDE. .