Historically low interest rates are history for now. The recent RBI hike of repo rates by 90 basis points will impact new home loan borrowers the most as they have just started their repayment journey, and their loan tenor is long. Since most home loans are taken on the floating interest rate these days, borrowers will have to face an increase in their loan tenors.
Recent home loan borrowers had taken home loans at rock-bottom rates, such as 6.5% for home loans, but this golden period of low-interest rates has ended. The loan tenor and EMIs will increase with more hikes in repo rates in the future. What should new borrowers do now?
Don’t panic
We’ve exited an era of falling rates. We’re entering an era of rising rates and inflation. At some point, inflation will fall, and interest rates will reverse again. So avoid panicky decisions. This is key. Interest rates are cyclic, and these ups and downs are unavoidable. But thankfully, with most floating-rate loans, the EMIs don’t change. They remain constant. Only the loan tenor will increase due to a rise in your loan rate. So in most cases, the rate hikes will not destabilise your finances.
Be on-time with EMIs
Align your finances for timely payment of your EMIs. Not paying would be even more painful considering the penalties you may have to pay, and your credit score can also get badly impacted if you delay your EMIs. Ensure you have funds in your savings account to tide over at least three months of income loss. In an adverse economic situation, the savings will allow you to pay your EMIs on time.
Refinance to lower rate
The rule of thumb is that refinancing is a good idea when you get a lower interest rate of about 50 basis points and when it makes sense in the long term to refinance despite the costs involved. If your credit score and income have gone up, you may have better chances of getting a lower interest rate. Refinancing to a lower rate will provide interest savings in a rising rate scenario. Speak with your lender about refinancing options or check with another lender. Take the time to understand loan benchmarks. The cheapest home loans today are linked to the repo rate and provided by banks.
Pre-pay now
To control tenor extension, you may choose to pre-pay a loan. You may make a single, strategic lump-sum pre-payment that helps erase the additional interest increased due to the repo rate hike. You can also pre-pay 5% of your loan balance yearly to reduce the burden of longer tenor and increased interest. These are some tips to keep your interest under control. Depending on your financial situation, you may choose any of these methods.
Increase EMI as income increases
You may voluntarily increase your EMIs, and the additional amount you pay will act as a pre-payment. This will help pay off your loan faster. However, you must remember that your EMIs should not exceed 30-40% of your monthly income to avoid impacting your other financial commitments. Your EMIs should not affect your day-to-day expenditure. If the EMIs are too high, financial stress increases, and the chances of missing an EMI increase. So step up your EMIs basis your affordability and in line with your rising income.
Rising inflation means another repo rate hike is on the way, and interest rates may go up further. But remember that rates will fluctuate. What really matters is your financial readiness. New borrowers should ensure timely EMI payments, create an emergency fund for six months, and keep pre-paying when they have the funds. These methods will help you sail through this financial situation and keep you well-prepared for the time ahead.
(The writer is CEO, Bankbazaar.com)