How To Cope With Rising Home Loan Interest Rates
Fluctuation in interest rates is difficult to predict. Home loan borrowers are not flexible enough to manage such fluctuations easily. Their budgets tend to be fixed, and rising interest rates can have a huge impact on their living standards.
MakaaniQ tells you how to deal with a home loan interest rate hike.
The Reserve Bank of India (RBI) lends to the banks for a short-term at the Repo or the Repurchase rate---also known as the benchmark interest rate. When the repo rate rises, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it raises the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it lowers the repo rate. Repo rate is at 6.50 per cent, at present.
However, one thing you should understand when you read the headlines about the interest rate hike is that many lenders, even if they raise their base rate (now called Marginal Cost Fund Based Lending Rate-MCLR) in reaction to the RBI's repo rate rise, they do not change the existing equated monthly instalments (EMIs) of their home loan borrowers. In fact, they only change the home loan tenure of the home loan for operational purposes. This does increase the cost of your credit. Higher the tenure of the home loan, more you will end up paying over the long run.
Re-plan your budget
See if you are spending wisely. Make sure that your money is not wasted on expenses that you can avoid. See if you can compromise on a few expenses. Use the internet to re-work on your budget. You can also seek an expert's advice.
Is your spouse working?
If your partner is working and if you did not include her income while calculating the home loan eligibility, you can consider this now. Your lender may be a little hesitant in doing so because this would require certain operational changes. But you can certainly use various home loan calculators available online, to evaluate the home loan eligibility, taking into account your wife's/husband's income, to re-build the budget and the rising monthly expense for home loan.
Sell off assets you can live without
For instance, if you own two cars, consider selling one and use the money to pool into the investments that can give you monthly returns to cope up with an increased home loan EMI. You should only sell off assets you can live without. Try selling ones that require maintenance. Getting rid of them can also save you some money.
Move to a lender who has kept the interest rate unchanged
How about shifting your home loan to a lender who has kept the base rate unchanged? You can also bargain under such situations. For example, you can ask the new lender to waive off the processing fee (PF). In the process of moving to a new lender, your existing lender may even give you a better deal because he does want to lose a customer.
Have you heard of 'interest only' home loans?
Borrowers who want to lower their initial instalment payments mostly use an interest only loan. This simply means that instead of paying both the interest and the principal components, you only have to pay the interest component for a short while (like 5-10 years). This gives you the time to build your financial corpus before the principal component is back in the EMI payment. You can always ask your lender for this “interest only” option if you think that it would be difficult for you to repay the loan, given the rising monthly burden.
Do your research
In financial matters, research is the key. Learn more from online sources of home loan information. Try to know more and more about home loan products and schemes. Discuss it with your lender, if you find something that can help you improve your situation.