Lower home loan interest rates are always a lucrative proposition for property buyers. Over the past two years, there has been a steep decline in the repo rate. Home loan rates, which are now linked to the repo rate, have also fallen to record lows.
But 2022 is being seen as the year when home loan rates may start to rise again. To handle a sudden hike in home loan rates or tenure, do your financial planning carefully. Here’s how to handle it.
Where rates are now
The Reserve Bank of India (RBI) in its latest monetary policy review meeting decided to keep the repo rates unchanged at 4% and the reverse repo rate at 3.35%. In fact, there has been no change to the repo rate since May 2020. Property buyers today are able to get home financing for less than 6.5% now, a historic low, but this can’t continue forever.
Repo rate basically is the interest rate at which the RBI provides overnight liquidity to banks. If it goes up, home loans become expensive. If it goes down, loans get cheaper. Rates had already fallen to record lows of around 6.8% by December 2020, but they continued to fall through 2021, with some lenders going as low as 6.4%. As inflation rises, there may be no room for more cuts. Recently, a few financial institutions have hiked their fixed deposit (FD) rates and some lender’s home loans have also got slightly costlier. Borrowers should pay attention to these trends. Rising deposit rates hint at rising loan costs as well.
Check loan benchmark
From October 2019, RBI mandated banks to link loan interest rates to external benchmarks such as the repo rate or the T-bill rate. Most banks have adopted the RBI’s repo rate as their home loan benchmark. A repo-linked home loan has a stabler interest rate and is also easier for consumers to understand in terms of pricing, spread, and expected rate revisions. This was not the case with older benchmarks.
Check your existing benchmark rates which may be higher because of which you are paying a bigger EMI or have a longer tenure. Speak to your lender and get the same in sync with the current repo rate.
Refinance to repo-linked loan
You can either choose another lender and refinance your existing loan or make a request to your current lender to link your loan to repo rate. Only banks provide repo-linked loans. Home finance companies may give you the option of lowering your interest rate at a fee. If the rate change is significant—for example, 50 basis points or higher —you could potentially save lakhs of rupees over the rest of the loan tenure.
Let’s take an example, suppose you take a home loan of Rs 50 lakh at 7% interest rate for 20 years. For this loan, your total interest payable will be Rs 43,03,587. On the other hand, if the same home loan needs to be paid at 7.5% interest rates then your total interest payable will be Rs 46,67,118.
Consider one pre-payment at the start of the year
Pre-payment helps accelerate your loan payment. At the start of your loan, even a single additional EMI prepaid can shave off months from the loan tenure, saving you lakhs. For example, for a `50 lakh loan taken for 20 years at 7%,
pre-paying 5% of the loan at the start of every loan year can help pay off the full loan in 111 months instead of 240. It
also reduces your total interest from Rs 43.03 lakh to Rs 17.7 lakh. You’ll have to follow the lender’s minimum pre-payment rule. Some accept 1x your EMI, others may need 3x.
Marginally increase EMI if income rises
Once your monthly income increases, it is a good idea to opt for an EMI increase as it will reduce the overall tenure of your home loan and interest will also come down. You must choose to increase your EMI by a small percentage in order to save interest. The increase in percentage must be decided based on the increase in your net income. The amount you pay over and above your normal EMI will be adjusted against the principal and not interest. It thus becomes a way for you to pre-pay your dues with smaller amounts instead of having to meet the minimum pre-payment requirement.
Loan interest is one of the biggest costs of home ownership—sometimes bigger than the cost of the property itself. It needs to be controlled to minimise your costs. Smartly tweaking your loan payment terms could lead to heavy savings.
The writer is CEO, BankBazaar.com
