Home buyers always have one eye on the RBI monetary policy for any changes in the interest rate. With floating interest rates, the most obvious choice amongst home buyers, any change in the rate of interest has a huge impact on home loan users. As a result, many borrowers are questioning their decision to buy a home and also fearing the worst in case of a further rise in interest rates. Since the future is not in our control, stress for the same is futile. But, if we can plan for the present, the future is ought to be better. Here are seven tips for home loan borrowers for a better tomorrow.
Recheck for cheaper rates with the existing lender: Seems like an irrelevant option in the first place, but is a masterstroke in itself. Although banks have to follow the RBI rate revisions, the interest rate for every borrower may be different, depending upon numerous factors such as credit score, loan tenure, collateral etc. Hence, in case your criteria seem favourable, there are chances the lender might offer you an attractive interest rate, which may be lower than the ongoing rate. This way not only do you save from a lower rate of interest but also save on processing fees and other charges if you opt for outside lending.
Refinancing from a separate lender: When option one becomes redundant, it may be wise to check out the interest rates of other lenders. The first step for a rising rate of interest is to avail the lowest available rate in the market, it may be either from an existing lender or from another lender. However, in case of opting for a separate lender, one must be watchful against the high processing fees and other charges such as legal, stamp duty, and a notice of intimation etc., Weigh the options from a longer-term perspective and check whether the savings are considerable or not is important.
Increase your EMI: When external forces become useless for reducing the interest rate, you can internally reduce the burden by increasing your current EMIs. Rising interest rates can cause a substantial increase in loan tenure. Hence, even though you may feel safe because of no change in EMI amount, in reality, your tenure has been rising meaning you may end up paying your EMI for a longer period than originally subscribed. A simple 5% increase every year in your EMI can reduce your tenure by approximately seven years (assuming a 20-year loan period). Even with a rising rate of interest, if you keep increasing the EMI, your tenure will remain intact, if not decrease.
Partial principal repayment: In case a monthly increase in EMIs is a difficult thought to consider, you may opt for an annual pre-payment. Any sudden income, such as a bonus or incentive, might be a useful tool in saving yourself from rising interest rates. In this case, your monthly budget remains intact, while you save money in rising EMI or tenure. One extra EMI payment can result in a reduction of three years of tenure (assuming a 20-year tenure). This method can be helpful to home loan borrowers from the business class as well because of their additional income-generating capabilities.
Paying off 5% of loan every year: At first, this may seem like a lot of money. However, in every home loan, the mathematics is higher the principal amount, the higher the interest. Any pre-payment directly reduces your principal amount and your interest amount. The result is saving on interest and faster loan closure. Pre-payment of 5% of the principal amount every year will result in the closure of the loan tenure of 20 years in approximately 12 years. That is eight years of interest savings, which is quite substantial in terms of money. This is a good strategy for home buyers with large families, who simply cannot afford a rented house.
Complete pay-off if possible: The simplest method of all but not the easiest. A home loan practically is a good option for tax savings. But, if that is not the objective it is always ideal to remain debt free. Rising interest rates results in more and more interest payment and lesser debt repayment. Therefore, as and when the interest rates increase, banks rejoice, but on the other hand, it becomes the worst nightmare for borrowers. If the loan is not huge and tax savings are not on the agenda it is always ideal to close the loan at the very next opportunity.
Invest in SIP and recover the cost: With a high amount of loan and long tenure, the borrower of a home loan is subject to paying almost double the property cost. For example a loan of Rs. 30 lakhs for 25 years, at 6.75% interest, the borrower will end up paying Rs. 62 lakhs (assuming the borrower does not follow any of the above tips). Now if the borrower invests a minimum of 10% of the total cost (loan plus interest) in SIP for 20-year tenure at a 12.5% rate of return he/she will end up with a corpus of around 63 lakhs. This way the entire cost of your property is recovered and thus making your property free of cost.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
