The recent 90 bps hike in the Repo rate and other policy rates by major central banks across the world confirms the signs of the return of the rising interest rate regime. Given the scenario, the home loan borrowers should expect a subsequent increase in their EMI amounts, and the overall interest cost will also rise in line with it. Those who are not willing to opt for higher EMIs will probably choose to increase their repayment tenure, which would result in an even higher interest costs for them.
Going forward, as anticipated there would be a reduction in the ongoing interest rates, and the same will be on an upward trend. There is also a lot of dilemma for the new home loan borrowers and also for the existing ones about how to approach this situation and still save some money while going forward with the loans. Here are a few tips for both the new and existing home loan borrowers about how to reduce their burden of the additional interest cost:
For new borrowers –
As per the guidelines issued by the RBI, lenders are now eligible to finance up to 90% of the actual cost of the property under any home loan scheme, depending on various other factors. Keeping the cost under consideration, the proportion of the actual amount financed through the loan is known as the Loan-to-Value (LTV) ratio. In various cases, the ratio varies from 50 – 90%, wherein the borrowers contribute the remaining amount in the form of a down payment or marginal contribution.
While as a general sentiment, the borrowers usually prefer loans with a higher LTV ratio as it eases out the down payment, while on the other hand opting for loans with a lower LTV ratio has its own advantages. Breaking down the LTV for a better understanding, we can suggest that a lower LTV ratio for the same repayment tenure would result in lower interest costs and a lower EMI amount. Moreover, a lower LTV ratio also reduces the overall credit risk increasing the chances of the home loan approval. However, just to reduce the LTV, borrowers should keep away from using their emergency funds or investments just to make higher down payments.
Extended repayment tenure
When availing of a home loan, a new borrower can also opt for longer loan repayment tenure that would reduce the EMI burden on the borrower. In addition, longer repayment tenure can also increase the borrower’s loan eligibility as a result of reduced net monthly interest outgo. However, longer repayment tenure increases the overall interest cost, so the borrowers shall consider making part prepayments whenever they have surplus funds over the period of repayment.
Compare offers with prospective lenders
A Home loan involves various factors like rate of interest, processing fee applicable, repayment tenure, and the loan amount, and they are not the same for every borrower and can vary widely across lenders, which majorly depends on the overall cost of funds and the credit assessment of the borrower.
Therefore, it is highly advised that a new borrower shall compare all these factors while looking for a loan and that too from as many lenders as possible. For comparing various offers, a borrower can visit online financial marketplaces and can make use of EMI and loan eligibility calculator to get the best deal according to their monthly income, credit score, job profile, and other eligibility criteria.
For existing borrowers –
Make regular prepayments
Most home loan lenders provide prepayment facilities to their borrowers to pay either the entire outstanding balance or a part of it. The main objective behind prepayment is to reduce the accumulated interest cost for the borrowers. While making the prepayments, borrowers can choose either EMI or tenure reduction. As a result, if they choose to reduce the tenure, the interest cost would be higher than the previous arrangement, and if they choose to reduce the EMI, the tenure would be longer.
If increasing the EMIs adversely impacts the financial position of a borrower, they should not sacrifice their monthly savings or existing investments. Later they will end up paying a higher rate of interest for achieving those goals.
Home loan advantage Overdraft
Over the last few years, lenders have come up with various credit products revolving around home loan. Nowadays, most of the lenders offer a home loan overdraft facility branded as a home loan advantage,and others that requires a higher liquidity quotient. The advantage of this facility is that a borrower gets an overdraft account opened where they can park the surplus and can withdraw from it as per their personal cash flow requirements.
The average interest rate applicable on this facility is in the range of 3-7%, and the interest amount is calculated after deducting the surplus in the savings/current account from the outstanding home loan amount. Thus, the borrowers have the benefit of making prepayments without compromising on their liquidity position.
Home loan balance transfer
This is considered to be the most widely accepted way of saving on your interest payments. With this facility, an existing borrower can transfer their entire outstanding loan balance to another lender at a lower rate of interest. This option is most suitable for borrowers who have a home loan running at a higher rate of interest and are now eligible for loans at lower rates due to improved credit score or higher income.
However, an existing borrower should also conduct a thorough cost-benefit analysis of availing of a balance transfer as it will require fresh documentation and may incur additional costs depending on the loan amount. Borrowers should only opt for a balance transfer if the savings in the interest cost and/or other benefits exceed the cost involved in transferring the loan.