With the rise in income, repayment capacities are better for professionals these days. As a result, younger buyers are now opting to purchase their homes at an early stage in life. However, home loans indicate a major financial commitment for the long haul and this can be troublesome when the rates of interest fluctuate and increase. The RBI has recently increased the repo rate by 25 basis points and this comes after several banks have already increased their MCLR based lending rate. This effectively indicates that home loans will be more expensive while deposits will have higher rates of returns as well.
In this scenario, how do you tackle this fresh increase in home loan interest rates? The home loan could naturally be the largest debt in your own financial portfolio. However, you should list down other debts that you have and for which you may already be paying more in terms of the interest rate. Try to prioritize loans or debts with high interest rates such as unsecured personal loans or credit card dues. Pay them off first and then concentrate on the home loan since the interest outgo will naturally increase after the hike in rates. You should also balance your investments and savings with your liabilities. You should create a better and bigger contingency and surplus fund which can be used to repay the home loan earlier as well. This can be through a new investment or through existing investments. You can choose options like short-term debt mutual funds or even liquid mutual funds for this purpose along with recurring or fixed deposits.
Analyze your monthly expenses and see the corpus that you can allocate each month for investments. You should work out a new strategy for home loan repayment. Pre-paying periodically is a great idea since this will cut down on the overall interest payment that you have to make. This is also good at the very beginning of early years of the home loan tenor. You can also switch to a longer reset period of up to 2 years by negotiating with the lender in case the MCLR remains the same. However, in case there are only 2-3 years remaining for the home loan to finish, you should just maintain the loan as it is in order to boost your tax deductions. In case you still feel that you are paying more than you ideally should, you can try switching to another financial institution by transferring your home loan.