Tips in dealing with home loan interest hikes
21 February, 2022
In today’s times buying a home is not an inspiration reserved for the 40’s or 50’s generation, it is very much a realistic dream for people in their 20’s and 30’s as well.
In today’s times buying a home is not an inspiration reserved for the 40’s or 50’s generation, it is very much a realistic dream for people in their 20’s and 30’s as well. You cannot, however, deny the fact that any long-term financial commitment can be risky as our long-term income source may not be certain and the loan interest rates may rise beyond your affordability. A borrower’s loan portfolio is impacted with every hike in interest rates. Considering this impact, you as a borrower can prepare proactively to face the increased burden of repayment. Besides, there are ways how you can adjust your finances every time your home loan interest rate surges. We bring you some such ways,
- Evaluate your savings and assets: To avoid any critical impact of home loan interest hikes, you should always evaluate and increase your savings, create surplus funds and try to pay off as much of the loan as possible and also as early as possible. You can consider taking out this surplus from existing investments like mutual funds, fixed deposits or recurring deposits. However, make sure that the interest earned from these investments is less than the home loan interest rate.
- Evaluate all outstanding loans: Home loans are usually the biggest debt for any individual. However, there might be other loans like credit card loan or personal loans which might have higher rates of interest. By making a list of all your loan debts and then prioritizing payment of the debts with a higher interest rate will help you to focus more on the expensive loan. If your home loan is your most expensive loan, you should prioritise its repayment over any other loans that you are repaying.
- Negotiating terms and conditions with the home loan lender: It is a market practice to negotiate or at least discuss with the lender when it comes to interest rate hike. Therefore, before agreeing to pay the interest hike it is advisable to speak to the home lender and try negotiating. One can use a home loan calculator to calculate the impact of the interest and try negotiating with the lender to adjust the hike in interest with the tenure of the loan or the amount of the EMIs. Thus you can restructure the loan to suit your requirement.
- Loan Pre-payment: EMI has two parts – principal amount and interest on your principal amount. Part prepayment is one of the most effective tools to bring the cost of borrowing down. If you have surplus cash, you can consider paying a part of your loan in advance thus decreasing the principal amount which then reduces the EMI despite a rate hike. However, this step is recommended if the prepayment of the loan considerably reduces the EMIs or your loan burden. Because sometimes it is more beneficial to invest the cash elsewhere and earn more as return the interest cost saved by loan prepayment.
- Same tenure with increased EMI: To mitigate the impact of increasing rates, one must tweak their approach of paying EMIs. Most borrowers make the mistake of increasing tenure instead of increasing the EMIs. But the financial feasibility is to increase the EMIs and lessen the tenure of the home loan. It’s a good way to save a significant amount in interest payment, which is dependent largely on the tenure of the loan.
We hope that by following these tips you will be able to tackle the impact of rising on home loan interest rate and also be prepared for the financial worries caused by steep interest rates and increased EMIs.