Homeownership, for many, represents the realisation of a cherished dream. Yet, it’s crucial to remember that this dream comes with its own set of financial responsibilities, particularly when it comes to home loans. Navigating the ever-changing landscape of interest rates can be particularly challenging, especially with the recent unprecedented hikes. With careful planning and proactive measures, however, borrowers can equip themselves to weather these financial storms.
Understanding the Floating Rate Risk
Home loans often offer ‘floating rate’ options, initially tempting due to their lower interest rates compared to fixed rate options. However, this seemingly convenient perk is a double-edged sword. While you benefit when rates fall, you become vulnerable when they rise. Floating interest rates are connected to broader market movements, that lead to fluctuations. In simpler terms, your EMIs can increase significantly alongside rising interest rates, impacting your budget substantially.
The Long Game
Home loans typically come with long tenures, spanning decades. This means navigating multiple economic cycles, including periods of rising and falling interest rates. Borrowers usually witness several setbacks in interest rates during their loan tenure. Therefore, preparing for such shifts becomes crucial for financial stability.
Buffering Your Budget
The excitement of buying a dream home can often lead to stretching one’s budget to the maximum. However, as financial experts warn, expensive home loans may become difficult to repay if there is a rise in interest rates. To safeguard against such scenarios, building a buffer within your household budget is vital. Aiming for an EMI that’s 20-25% lower than your actual affordability limit provides breathing room if the rates hike unexpectedly.
Beyond Tenure Extension
While lenders often resort to extending loan tenures to manage rising interest rates, this solution has limitations. It only works until the borrower reaches their retirement age, typically between 60 and 70 years. Exceeding this limit forces lenders to increase EMIs, potentially putting an even greater strain on finances.
Minimising Borrowing Cost
Opting for EMI increases over tenure extension, whenever possible, proves more cost-effective in the long run. A longer loan tenure results in higher total interest costs. Therefore, prioritising higher EMIs, even if challenging initially, helps save on overall repayment costs in the long run.
Prepayment Prowess
Anticipating future interest rate fluctuations involves planning for prepayments. For those with additional financial strength, accelerating repayments through prepayments further reduces the outstanding loan amount and minimises overall interest costs.
Utilising windfalls, bonuses, or regular income increases to make partial prepayments consistently can significantly chip away at the loan principal. This results in reducing the impact of potential rate hikes.
Leveraging Improved Credit
Borrowers who initially secured higher interest rates due to past credit challenges can benefit from their improved credit scores. By maintaining disciplined repayment habits they can build their score and prove their creditworthiness. Existing borrowers with improved credit profiles can opt for a home loan balance transfer.
This option enables them to secure lower interest rates for the same loan from other competing lenders. It allows them to refinance their loans and take advantage of their better credit standing.
Interest Rates offered by Multiple Lenders
One of the primary steps when applying for a home loan is to check the interest rates offered by various home loan providers in India. This can help you choose the loan offer that suits your requirements. Here is a list of some options available to you:
| Loans | Interest Rates |
| ICICI Home Loan | 8.75% p.a. onwards |
| HDFC Bank Home Loan | 8.50% p.a. onwards |
| PNB Housing Finance Home Loan | 8.50% p.a. onwards |
| L&T Finance Home Loan | 8.60% p.a. onwards |
| Bajaj Housing Finance Home Loan | 8.50% p.a. onwards |
*Disclaimer: The aforementioned rates are subject to constant change at the lender’s discretion.
Navigating rising interest rates on a home loan can be daunting, but it doesn’t have to be a financial nightmare. By understanding the underlying risks, building financial buffers, and actively managing your loan through strategic prepayments and potential refinancing, you can navigate this challenging landscape with confidence. Remember, financial foresight is your key to stability, ensuring your dream home remains a source of joy, not financial stress.
