Smart Ways For Home Loan Borrowers To Protect Themselves Against Interest Rate Hikes

Highlights of Home Loan Rates 

• Current home interest rates start at 6.70% p.a. 
• Most lenders base their current home loan interest rates on RBI’s Repo Rates
• Repo Rates are reviewed every 3 months
• There are other interest rate benchmarks like MCLR and BPLR
• Interest rates are of two kinds: Floating Rate and Fixed Rate
• Home loans are generally issued under floating rate of interest

Recent Repo Rate History

A home loan is the only option for many of us to fund our dream home.  Shopping for the best home loan in the market is a meticulous process. The current home loan market is very competitive and most banks offer similar interest rates. So the deciding factor would be the value added you get along with your home loan. 

Interest rate is one of the key deciding factors during your home loan shopping. Though the base rate is almost the same across the spectrum, processing charges, prepayment charges and other fees play a vital role to choose a particular home loan. 

Home Loan Interest Rates

Home loan interest rates are of two types; Fixes Rate and Floating Rate. Most bankers don’t offer a fixed rate for home loans as the differential is quite high. The floating rate of interest is based on different benchmarks like BPLR based, MCLR based and Repo Rate based. 

Repo Rate is the rate at which commercial banks borrow money from RBI. This is done by selling their securities, to maintain liquidity. This exercise is a process followed by the central bank to keep inflation in check. The Repo rate is reviewed by the RBI every three months. 

Your home loan interest rate based on Repo Rates is called Repo Linked Lending Rate (RLLR). RLLR consists of a few factors that calculate your final interest rate. 

RLLR = Repo Rate + Spread or Margin + Risk Premium

The Spread or Margin is determined by the bank. It differs from bank to bank based on their policies. Risk premium also varies. So basically, the Spread and the Risk Premium will stay constant while repo rate changes based on RBI’s policies. 

Since home loans are mostly on a floating rate of interest, every time the repo rate changes, your interest rate will also change. 

How do repo rate changes affect my home loan EMIs?

The objective of adjusting the repo rate is to influence the flow of money in the economy. The flow of money in the economy is reduced when the repo rate rises, while the flow of money in the economy is increased when the repo rate falls.

How can I protect myself against interest rate hikes on my home loan?

Home loans are long time commitments. If you don’t plan properly, the burden of home loan repayments can drag you down. Interest rate hikes can only add to the burden. 

Here are some tips you can follow to negate the effects of an interest rate hike: 

1. Go For Regular Pre-Payments

Pre-payment charges are non-existent on most home loans these days. Take advantage of this and pay as much surplus amount as you can. Prepayments reduce your interest burden considerably. 

During the first few years of loan repayment, most of the EMI amount is put towards the interest component and less towards the principal. So any additional amount you come across, like salary hikes, bonuses or any other income should be used for prepayments. 

2. Opt For A Shorter Repayment Tenure

A longer repayment tenure translates into more interest payment. To counter this, go for a shorter repayment tenure. Decreasing the tenure by a few years will have a major impact on your total interest outflow. You may find a pinch in the initial years as the EMI amount will be higher. But with time and as your salary increases, your EMI repayments will fall in place. 

3. Revise Your EMI Amount Annually

This is a very good practice for any kind of long term loan. Our salaries see some kind of hike every year, even if it is quite small. Turn it to your advantage. Contact your bank to increase your EMI amount every year corresponding to your salary increase. This way, you will be able to pay off your loan sooner and won’t feel much burden on your monthly cash outflow. This may require a little disciplined budgeting for a few years but it is really worth it when you save a ton on the interest amount. Closing down the home loan much earlier than expected is a great advantage to your finances as well. 

4. Go For Home Loan Balance Transfer

If you feel that your current interest rates are on the higher side, look for balance transfer options. A balance transfer will get you a lower interest rate and a few other value-adds from the new lender. Many lenders even offer zero interest payments for the first few months which will translate into considerable interest savings. You may also get a top-up loan while doing a balance transfer, which can be used for other home needs like that modular kitchen you have been eyeing or those trendy home furnishings you saw in the stores. 

Key Takeaways: 

• The interest rate hike is inevitable in long term loans like home loans
• You can be prepared well in advance to tackle any interest rate hike
• A prepayment is a vital tool that can help you to pay off your loan sooner so that interest rate hikes don’t affect you much
• Balance transfer needs careful consideration as the new lender will also charge processing fees and other charges

FAQs: 

1. How can I reduce my home loan EMI?

• Make part prepayments
• Pay more than your EMI
• Go for a balance transfer
• Increase your tenure

2. Can I negotiate with my banker to reduce my home loan interest rate? 

Yes, you can talk to your banker about your interest rate and other terms. You can negotiate with them using current market data and the interest rates charged by their competitors.

3. Is there a chance for my home loan interest rates to go down?

Most home loan rates are based on repo rates. If the repo rates go down, your interest rate will also go down correspondingly. 

4. Which lending rate is better, RLLR or MCLR?

In the current market, RLLR is deemed better as it calculates interest on a daily reducing average balance, which reduces your overall interest outflow. 

5. Is it better to go for a shorter tenure or a longer tenure?

This decision should be based on your monthly EMI payable capacity. If you can afford a higher EMI payment, definitely go for a shorter tenure. This will reduce the overall interest amount you will be shelling out. You can also opt for a longer tenure in the beginning and make part prepayments whenever you come across surplus money. This way you are not overstretching your budget in the initial years. You can also talk to your banker and modify your tenure to suit your needs.