Home loans can be expensive, How to reduce the burden in these three ways

If your financial situation is quite good and the loan interest rate increase makes little impact, there is no need to take any action. Because of the rate increase, some EMIs will be higher. If the interest rate is reduced in the future, the EMI will be reduced as well. However, if your financial planning is deteriorating as a result of the interest rate hike, you must take action. Let us hear from Adil Shetty, CEO of Bankbazaar.com, on what may be done.

Since 2019, interest rates on home loans have been falling. From 2020 onwards, the Reserve Bank has held the repo rate steady at 4%. It has not been increased even once up to this point. This is why, if qualified, a house loan with a 6.40 percent interest rate is available. Several banks and finance companies are making loans at rates lower than 7%. However, inflation continues to climb. Loans will not be as inexpensive as they are currently in such a case. This year, policy interest rates are expected to rise. This will increase the cost of house loans.

How expensive will a home loan be?

Assume you had a 20-year house loan with a 6.50 percent interest rate. You will pay approximately Rs.79,000 in interest on the principal amount of this loan for every Rs.1 lakh borrowed. Your interest will be roughly Rs.82,000 if the loan interest rate rises by 0.25 percent to 6.75 percent. If the rate rises to 7%, the interest will be Rs.86,000. The meaning is clear: even a slight increase in the interest rate results in a difference in interest of thousands of rupees.

How much will the EMI increase?

In general, an increase in interest rates lengthens the term of your loan while keeping the EMI constant. For example, if you borrow Rs.1 lakh for 20 years at 6.75 percent interest, your EMI will be Rs.760. However, if the interest rate rises to 7% while the EMI stays unchanged, you will be required to pay EMI for 20 years and 10 months instead of 20 years and 20 months. However, if you chose to adjust your EMI when you took out the loan, the rate hike will increase your EMI. In this case, your loan will only be for 20 years, but your EMI will be Rs.775.

When the interest rate on your house loan rises, you will have three alternatives

1. Refinance

Home loan refinance i.e balance transfer option is opted for when there is a large (0.25-0.50%) difference between your loan rate and the market rate. Suppose your rate is 7.50% and loan is available in the market at 7%. In such a situation, balance transfer can be beneficial. In such a situation, if you have 20 years left on your loan, then for every Rs.1 lakh loan, you will save about Rs.7,400. But balance transfer will be the right decision only if more than half the loan tenure is left. There are also transfer charges, such as processing fees and MOD charges.

2. Increase EMI

Your income will rise over time, but your EMI will remain fixed. However, you have the option to increase the EMI on your own. The additional EMI will be deducted from the loan’s principal. This will swiftly pay off your loan. The loan term will begin to shorten. This strategy is similar to a little down payment. For example, the EMI for a loan of Rs.30 lakh over 20 years at 7% interest would be approximately Rs.23,000. If you raise it to Rs.26,000 from the second year onwards, you would save three EMIs. The interest rate will also be reduced from Rs.25.96 lakh to Rs.25.10 lakh.

3. Make Pre-Payment

If you do not want to increase your EMI in the event of an interest rate hike, you have a third choice. You can deduct the loan principal if you prepay at least once a year. Most banks and credit providers expect you to pay at least 1-2 times the EMI amount in advance. For example, if you obtain a home loan of Rs.30 lakh for 20 years at 7% interest and make a prepayment of Rs.50,000 at the start, your EMIs will be cut by 7 and your interest will be decreased from 25.96 lakh to 24.48 lakh. Rupees will continue to exist.