Rising Interest Rates: How To Manage Your Home Loan

The Reserve Bank of India (RBI), in its last monetary policy review on Dec. 7, increased the repo rate by 35 basis points to combat persistent inflation and control the volatility of the rupee. The repo rate is the rate at which the RBI lends money to banks. This is the fifth increase this year by the RBI and each time the repo rate rises, lenders are forced to charge higher interest rates. If you’re among the millions of Indians with a home loan, you’re probably already feeling the pinch of rising interest rates. 

Rates have been on the rise and any increase in interest rates can cause monthly payments to skyrocket for anyone with a home loan or considering one. But there are ways to deal with rising home loan interest rates so that you can keep your monthly payments affordable. 

First, you can try to balance transfer your loan. This can be a good option if you can find a lower interest rate elsewhere. However, it’s important to keep in mind that you may have to pay some fees to do this. Another option is to simply make additional principal payments each month. This will help you pay off your loan faster and save you money in the long run. 

Finally, you can try to negotiate with your lender. If you have a good relationship with your lender, they may be willing to work with you to lower your interest rate. This is worth a try if you’re struggling to make your payments. No matter what you decide to do, it’s important to take action soon. 

Here’s a detailed list of tips to ease the pain of making repayments.

How to Make Home Loan Repayments Easier?

Refinance to a Shorter Loan Term

One way to lower your monthly payment is to refinance to a shorter loan term. You’ll pay more each month, however, you will be able to save on the interest component of your EMIs. Two, you will be able to pay your home loan faster. This is because, with a shorter tenure, you will be paying a lower EMI amount as compared to the EMI amount that you would have been paying for the same loan amount over a longer tenure. 

In addition, shorter-tenure home loans have a lower interest rate as compared to the interest rate for home loans with a longer tenure.

Prepaying the home loan

If you have the financial capability, you can make lump sum payments towards your home loan. This will help you to reduce your loan tenure and save on interest payments. 

Another way to lower your monthly payment is to switch to biweekly payments. Paying your loan biweekly is the same as making one extra monthly payment each year. With this type of payment plan, you make half a payment every two weeks. This adds up to 13 costs per year instead of 12, which can help you pay off your loan faster and save on interest. 

You can save a lot of money by prepaying your debt even if interest rates increase. Here is an example of how the concept works.

Scenario 1: 

Outstanding Loan Amount (in INR)  – 50,00,000

Remaining tenure of the loan  – 20 years

The interest rate in the first 12 months – 8.7%

Prepayment – Nil

Interest rate after 12 months – 9.2%

Total interest paid in 20 years (in INR) – 59,51,543

Scenario 2: 

Outstanding Loan Amount (in INR)  – 50,00,000

Remaining tenure of the loan (years) – 20 years

The interest rate in the first 12 months – 8.7%

Prepayment (in INR)  –  12,000 per month for 1 year

Interest rate after 12 months – 9.2% 

Total interest paid in 20 years (in Rs) – 57,80,138

Difference – 1,71,405

Amount prepaid – 1,20,000

Amount saved by prepaying the loan – Approx. 50,000

Shop Around for the Best Deal

With interest rates on the rise, it is essential to shop around for the best deal on home loans. Once you have checked your eligibility for a home loan, the next step is to compare home loan interest rates offered by different banks and financial institutions. 

After finding the best interest rate, it’s time to negotiate your loan with your lender. Use the online comparison tool to see what other banks are offering. This will help you negotiate a better deal with your current lender.

Consider Your Savings and Investments to Deal with Rising Home Loan Rates

Investing in savings and reducing debt should be your priorities if you are concerned about the rise in home loan interest rates. This will help you determine how much extra money you will need to put toward your mortgage each month. It will also help you decide if you need to sell any investments to free up cash.

When home loan interest rates rise, your savings and investment portfolio may be affected. Here are some steps to take to assess your situation.

1. Determine how much extra money you will need to pay each month as a result of the higher interest rates. This will help you assess whether you need to make changes to your budget or maybe need to re-evaluate your investment strategy. 

2. Review your savings goals. Are you on track to reach your goals or do you have enough cash reserves to cover unexpected expenses? If not, you may need to adjust your savings plan to make up for the increased costs of borrowing or reconsider your savings and investment strategy to make sure you are prepared for unexpected financial challenges.

Balance Transfer: Should You Go for it?

The interest rate on a home loan is subject to market conditions. Many times, it also happens that the interest rate that you are paying is higher than the prevailing rates. In this case, you can opt for a home loan balance transfer. This is a process where you can transfer your outstanding home loan from one bank to another bank. 

If you are not happy with your current lender, you can transfer your home loan to another bank at a lower interest rate. This is known as the balance transfer of a home loan. The main benefit of a home loan balance transfer is that you can save a substantial amount of money in the long run. This is because you will be paying a lower interest rate on your home loan. 

Another benefit of a home loan balance transfer is that you can also avail of a top-up loan and the amount of the top-up loan depends on the value of your property. Just to keep in mind, after taking into account the transfer costs, you must ensure that there is a difference of at least 50 bps so that you can justify the switch.

Fixed Rate Home Loan or Variable Rate Home Loan: Which One To Choose?

The answer to this question depends on several factors, including your financial situation and your risk tolerance. If you are comfortable with a bit of financial risk, a variable interest rate may be a good option. Variable interest rates are often lower than fixed interest rates, so you may end up paying less interest overall. 

On the other hand, if you prefer the stability of a fixed interest rate, this may be the better option for you. For an instance, if you expect interest rates to continue to rise, you may want to consider a fixed-rate mortgage. 

With a fixed-rate mortgage, your interest rate will be locked in, no matter how high-interest rates go. This can give you peace of mind and make it easier to budget for your monthly payments. However, because fixed rates don’t change with market conditions, you could pay more in interest than you would with a variable-rate loan.

Suppose you take out a home loan with a face value of INR 50 lakh at an interest rate of 8.5%, your monthly repayments would be INR 86,782 for a 20-year term. Now, suppose that the interest rate rises to 9%. The monthly payments on a variable-rate mortgage would increase to INR 89,973, an increase of INR 3,200. 

However, the monthly payments on a fixed-rate mortgage would stay the same at INR 86,782. Thus, in this example, you would save INR 3,200 per month by having a fixed-rate mortgage instead of a variable-rate mortgage. Therefore, if you are worried about interest rates rising in the future, consider a fixed rate loan.

Here’s our guide on Floating Vs. Fixed Interest Rate: What Works For Your Finance to help you choose. 

Bottom Line

Deciding to buy a home is a big one, and it’s important to be prepared for all that comes with it – including rising interest rates. When interest rates start to rise, it’s natural to worry about what that means for your mortgage. After all, a higher interest rate means a higher monthly payment. But there are a few generic things that you can do to make sure that you are prepared. 

Firstly, it is important to review your debt situation and make a plan to pay off any high-interest debt as soon as possible. This will save you money in the long run and help you to avoid getting into debt trouble as interest rates increase. 

Secondly, you should start to build up an emergency fund so that you have a cushion to fall back on if interest rates do start to rise sharply. In the event of a financial emergency, this will prevent you from having to take out expensive loans or credit cards. 

Lastly, make sure you keep an eye on your overall financial situation and that you aren’t overspending. If you can save money each month, you will be in a much better position to deal with any unexpected interest rate rises.