As home loan rates continue to rise and are expected to rise further, most homebuyers are now struggling with high monthly payments.
Hours after the Reserve Bank of India (RBI) raised its repo rate by 50 basis points (bps) on September 30, 2022, several banks, including ICICI Bank and Axis Bank, as well as non-bank housing finance companies , such as HDFC Ltd and LIC Housing Finance, have increased their home loan rates by almost the same amount, effective October 1, 2022.
HDFC raised its home loan rate by 50 basis points. In total, HDFC has implemented seven rate hikes over the past five months. LIC Housing Finance also raised the LIC Housing Prime Lending Rate (LHPLR), the benchmark rate to which all its loans are tied, by 50 basis points.
Considering a rise of 190 basis points in less than six months, it is certain that EMIs have increased. You have the option of not increasing the EMI, but in this case, the term of the loan is extended. Suppose a loan of Rs 30 lakh at 6.8% per annum is taken out for 15 years (180 months). If the interest rate of the home loan becomes 8.4% per year and the EMI remains the same, the term increases from 180 months to 223 months.
However, it is not advisable to increase the term of the loan. If you do, your overall interest payment goes up and you stay in debt longer. “It is an ideal situation if a surplus can be generated and EMI can be increased by an appropriate amount. If managing the allocation of additional money for ongoing EMI seems difficult, one can aim to increase the EMI by a certain percentage regularly each year to meet the burden of interest payments,” says Arijit Sen, registered investment adviser with Sebi and co. -founder of Merry Mind, a financial advisory firm based in Kolkata.
Here are some strategies by which you could deal with high EMIs for home loans without increasing tenure.
Revamp your budget
It is always possible to reduce your budget a little if you look at all the expenses. Sen explains, “The process of increasing EMI begins with budgeting and cash flow planning. Family spending habits will need to be examined.
Repay the loan early
A salaried person can use the annual or performance bonus to prepay the loan. This will help him reduce the burden of interest payments.
“Prepaying 5% of the loan balance once a year pays off a 20-year loan in 12 years. Voluntary hiking IMEs act as an advance micro-payment. If you prepay an additional EMI each year, your loan closes in 204 months (17 years). If you increase your EMI by 5% each year, the loan will close in 151 months (12 years and 7 months). If you increase your EMI by 10% each year, you could close your loan in 119 months (9 years and 11 months),” says Adhil Shetty, CEO and Founder of BankBazaar.com, a financial services website.
Raj Khosla, Founder and Managing Director of MyMoneyMantra.com, a loan aggregator, adds, “Customers should make partial payment on their loan accounts, if possible, as interest is charged on the unpaid amount. This can help the customer maintain the same EMI rate for the remainder of the loan term. »
Issue Bullet refunds
You can also make bullet refunds. “For example, 17 times your current EMI will erase the impact of rate hikes on a loan with 20 years outstanding. Whether you repay slowly or quickly, prepayment is your only option to mitigate the impact of rate hikes,” Shetty says.
Refinance your loan
You can always transfer your home loan to a lender with lower interest rates. Before opting for this, you should research and compare interest rates between different lenders. You will also need to pay a nominal conversion fee to your existing bank or lender. It’s important to keep these transaction costs in mind before refinancing your home loan.
Negotiate with your bank
If you have a good long-term relationship with your bank, have a good credit history, and pay your EMIs on time, you can try to negotiate lower interest rates.