Smart ways to deal with increasing interest rates

July 7th, 2018

Reserve Bank of India hiked the REPO rate by 25 basis points on June 6, 2018. However, even before the RBI announced the increase in rates, many banks had already increased their MCLR (Marginal Cost of Funds based on Lending rates) by 10% which increased the home loan and other lending rates. This resulted in increased financial burden on the home buyers and home loan borrowers. However, the rates are comparatively lower as per the 2011-12 count, which recorded 13 interest rate hikes in 12 months.

Although the rate of interest accelerated for an end user, the existing rates are easy to manage, and it is the best time to buy a home. The government of India has initiated flagship schemes like Pradhan Mantri Awas Yojana and Housing for All scheme which provides affordable housing to the home buyers. The government has also granted 100% tax exemption on the profits of the developers constructing affordable residential housing. These kinds of schemes are attracting the developers to construct reasonably priced residential houses with improved infrastructure which ultimately benefit the home buyers.

With the implementation of RERA, the trust and faith of the home buyer on the developers has increased.  It has increased the lucidity and transparency of the construction process and helps the home buyer to keep a track of the progress. The schemes and the regulatory and development acts have proved to be beneficial for the end user. Even though buying a home in the current time period is beneficial for a new home buyer, how can an individual reduce the burden of a higher interest rate on the existing home loan. There are some basic points that should be taken into account to deal with the increased interest rates.

Increase EMI, reduce Tenure

The home loan borrowers have some options that they can choose to mitigate their burden of increased interest rate. A borrower can increase the EMI and insist on tenure reduction as with the increase in the interest rate the tenure gets extended.

The reduced repayment tenure can turn beneficial as the borrower can save the extra interest that they would have paid due to the extended tenure.

Pre-payment of loan amount

A borrower can also opt for part prepayment of the loaned amount to reduce the interest burden. The savings made by the part payment help a person save a substantial interest as well as it reduces the tenure of the loan.

Part Payment of loan amount

A borrower can use surplus cash to pay off a part of the home loan which will reduce the tenure and the interest payable. It will be easier for the floating interest rates as the banks cannot levy and foreclosure charges against pre or part payment of loan amount.

Switch Lender

Transferring the loan to a new lender offering lower interest rate may benefit a borrower ad result in savings as the banks are barred from levying and foreclosure charges on the floating interest rates. The switching of lender also depends upon the balance repayment tenure. It is not suggestive to a new home loan borrower or a borrower who is heading towards final repayment date as it will turn out to be tedious and not worth the effort. The old home loan borrowers can explore this opportunity after a detailed cost-benefit analysis. In most of the cases, the lenders offer a lower interest rate for refinancing a loan but it is imperative for a borrower to choose this option if the rate is lowered than 25 bps.

 

Clear the pathway for easy home loan

It is suggestive to a home loan seeker that fixed rate of interest might sound tempting as the banks may offer a lower rate of interest under fixed home loans but it is to be understood that they are subject to foreclosure charges which makes it a comparatively costly deal.  It is also suggested that the customer should choose a project that is under-construction and holds construction-link plan and the lender who is ready to pay the developer according to the stages of construction. It is not advisable to make full payment of agreement value.

An individual should opt for a home loan according to the repayment capacity, which includes income, living expenses and commitments. The loan amount should not depend upon what a bank approves to pay. Adding to it, it is advisable to go for floating rate of interest which comes with an option of no foreclosure charges and accepts part or pre-payment.

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