Historically low interest rates are now a thing of the past. The recent RBI hike in repo rates by 90 basis points will have the biggest impact on new home loan borrowers as they have just started their repayment journey and their loan tenure is long. Since most home loans are on variable rates these days, borrowers will face an increase in the term of their loans.
Recent home borrowers had taken out home loans at lower rates, such as 6.5% for home loans, but that golden period of low rates is over. Loan tenure and EMIs will increase with more repo rate hikes in the future. What should new borrowers do now?
We have emerged from an era of falling interest rates. We are entering an era of rising rates and inflation. At some point, inflation will fall and interest rates will reverse again. Avoid decisions taken in panic. This is the key. Interest rates are cyclical, and these ups and downs are inevitable. But fortunately, with most variable rate loans, the EMIs do not change. They remain constant. Only the term of the loan will increase due to an increase in your loan rate. So in most cases, rate hikes will not destabilize your finances.
Be on time with NDEs
Align your finances for fast payment of your EMIs. Not paying would be even more painful considering the penalties you might have to pay, and your credit score can also be badly affected if you delay your IMEs. Make sure you have funds in your savings account to overcome at least three months of lost income. In an unfavorable economic situation, the savings made will allow you to pay your EMIs on time.
Refinance at a lower rate
The general rule is that refinancing is a good idea when you get an interest rate about 50 basis points lower and it makes long-term sense to refinance despite the costs involved. If your credit score and income have increased, you may have a better chance of getting a lower interest rate. Refinancing at a lower rate will provide interest savings in a rising rate scenario. Talk to your lender about refinancing options or check with another lender. Take the time to understand the benchmarks of lending. The cheapest home loans today are linked to the repo rate and granted by banks.
To control the term extension, you can choose to prepay a loan. You can make a single strategic lump sum prepayment that helps erase the extra interest increased due to the rising repo rate. You can also prepay 5% of your loan balance each year to reduce the burden of a longer term and increased interest. Here are some tips to keep your interest in check. Depending on your financial situation, you can choose one of these methods.
Increase EMI as income increases
You can voluntarily increase your EMIs, and the extra amount you pay will serve as your prepayment. This will help you repay your loan faster. However, you should remember that your IMEs should not exceed 30-40% of your monthly income to avoid impacting your other financial commitments. Your NDEs should not affect your daily expenses. If IMEs are too high, financial stress increases and the chances of missing an IME increase. So increase your EMIs according to your affordability and according to the increase in your income.
Rising inflation means another hike in repo rates is on the way and interest rates could rise further. But remember that rates will fluctuate. What really matters is your financial preparation. New borrowers must ensure timely EMI payments, set up an emergency fund for six months, and continue to prepay when they have the funds. These methods will help you get through this financial situation and prepare yourself well for the period ahead.
(The author is CEO, Bankbazaar.com)