When RBI increases its repo rate, it brings a subsequent burden on the borrowers of home loan. The increase in rates by RBI results in a rate hike for all loans. As a result, all the loans linked to MCLR have to drain a huge chunk of money in the form of interest payments.
The lenders these days ensure that you do not feel any immediate impact. However, in the long term, this will dig a big hole in your pocket. And so, we bring to you, this comprehensive guide on dealing with change in home loan interest rates.
Increase the EMI, not the term
When interest rates go up, most lenders increase the term and not the EMI. This prohibits any immediate increase in your cash outflow but proves to be more expensive in the long term. Theinterest rates are calculated by compounding rates. This implies, for the same amount, the loan with a longer tenure will cost you more than a loan with a shorter tenure.
To save money on interest payments, make a deal with your lender to increase the EMI rather than increasing the term.
Additional Read: Check out how to calculate interest rate on home loan
Pre-pay the loan
Whenever possible, pre-pay your loan. Most lenders do not charge extra for a pre-payment and if they do, it is still more cost-effective. Many financial experts suggest that instead of investing your funds for a lower return, use it to clear your other debts. Pre-paying your loan will help you to get debt-free ahead of the schedule. Additionally, this will save a significant amount of money from draining into interest payments.
It is to be made clear that pre-payment will not bring change in home loan interest rates, but will reduce the total amount paid as interest by reducing the tenure.
Refinance through a better deal
Changing your lender can help you when not all lenders have increased their interest rates. There are situations where, in response to hiked repo rates some lenders hike their interest rests while some do not. If your lender increases rates,you can switch to a better deal in the market. In technical terms, this is called ‘home loan balance transfer’ and can be initiated only after payment of at least 18 EMIs to the current lender.
However, it is suggested to change your lender only if the difference in the interest rate offered is more than 50 basis points.
Additional Read: What Is a Home Loan Balance Transfer?
Go for a fixed charge
One way of dealing with an interest rate hike is going for a fixed charge from the very beginning. Fixed interest rates, unlike floating rates, do not change with circumstances. You can also ask your lender to switch your rate from floating to fixed.
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