The Reserve Bank of India recently announced an increase of repo rate by 25 basis points to 6.5 %. It is the rate at which the RBI lends money to commercial banks.
Now, banks will have to pay a higher interest to RBI on the loans they take from the central bank. It was expected that the banks will pass the rise to various loans given, including home loans.
Home loans offer flexible repayment options, including fixed or floating interest rates, tenure, and repayment options, which can be tailored to meet the needs of individual borrowers.
Experts have suggested that the rise of interest rate on home loans can’t be ruled out. However, people who have taken a loan will have to face an increased EMI to accommodate the increased rate of interest, or they have to ask the bank to increase the loan tenure.
Also Read: Buying A House With Loan? Things To Consider Before Taking Home Loan
According to experts, customers can follow a few steps to minimise the cost of their EMIs.
Abdeali Tambawala, co-founder and partner, Mt K Kapital and Ratan Chaudhary, head, home loans, Paisabazaar, have suggested steps to reduce home loan EMIs.
How to reduce home loan EMI? Steps suggested by Abdeali Tambawala
1. Opt for home loan with overdraft facility: Though interest rate for such EMI would be slightly higher by ~0.50% to 0.75%, customer have option of parking excess fund in overdraft account to save interest. Over the life of the fund this can be used for considerable savings since home loan rates are higher than savings account rates.
2. Keep a check on interest rate cycle: Interest rate is considered to be at peak currently and it is estimated to reduce over the years. Home loan customers are advised to keep a check on interest rate cycle regularly to be sure that any reduction in interest rate is passed on to the customer and one is being charged the market rates.
3. Prepayment from excess surplus : Any windfall gains from incentives or bonus or surplus cashflow can be prepaid for reduction of loan and EMI.
4. Re-negotiation and re-financing strategy: It is always advisable to look at various offers and interest rates offered by other Banks/FIs on housing loan. Customers should re-negotiate the terms with existing bank in case difference is material. Customer may also opt for refinancing in case existing banker doesn’t offer the best terms.
5. Opt for maximum tenure: It is advisable to opt for maximum loan tenure available as per age since it will reduce the monthly EMI burden. EMI for 25-30 years tenure will be substantially lower than EMI for 15-20 years. Customer always have option of prepaying housing loan to extent of excess surplus available.
6. Maintain a high credit score: Ensuring regular repayment of all loans and credit card bills to ensure you get the best interest rate from the lender.
How to manage home loan EMI? Steps suggested by Ratan Chaudhary
1. Existing home loan borrowers can either opt for the EMI increase or tenure increase option, with the consent of the lender, as and when their home loan interest rates increase. Borrowers should note that opting for tenure increase option would result in higher interest cost than the EMI increase option.
2. Existing borrowers having adequate surpluses can prepay their home loans to reduce the impact of higher home loan rates. While doing so, they should preferably opt for the tenure reduction option to generate higher savings in interest cost.
3. Existing borrowers who have made significant improvements in their credit profile after availing their existing home loans can exercise home loan balance transfer. Their improved credit profile may make them eligible to transfer their existing home loans to other lenders at much lower interest rates and thereby, reduce their total interest cost.
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