It is good to see that the earning capacity of youngsters has increased with time and they no longer have to wait till their 50s to earn enough to afford their own homes. This has largely been made possible due to the easy availability of home loans and one can choose a long tenure of 20-25 years for repaying the same.
However, there is one thing to contend with- and that is the sudden hike in home loan interest rates that happens from time to time. The last repo hike of 25 bps by the RBI came just after prominent banks hiked their MCLR or the Marginal Cost of Funds Based Lending rates. The bottom line is that EMIs will go up in this scenario and you should know how to manage your home loan during this time. There has of course, been a cut in repo rates by 135 basis points last year courtesy the RBI and banks have only passed on reductions of 30 basis points to their customers. Most banks have reduced their 1-year MCLR which is used for home loan pricing to the tune of only 25-35 basis points over the last few months.
There are a number of factors as to why banks are not reducing their lending rates sufficiently. Home loan borrowers on the other hand, have to thus think of alternative options for lowering their monthly EMIs. Those who are first-time borrowers will be able to compare their interest rates across different banks and choose accordingly. Existing home loan borrowers can switch their home loans to a new lender at a lower rate of interest. Yet, before you decide on a home loan balance transfer, you should keep a few things in mind.
Here are a few important aspects
Home loans which are issued before April 2016 are based on prime lending rates or base rates and these older loans are based on higher rates than the MCLR based or repo rate based loans. There are no incentives to cut these rates and so one has to check if the loan is MCLR or base rate or PLR based and likewise the difference in interest rates should be evaluated.
One should only consider shifting the home loan to a different bank if the rates of the new bank are lower by at least 1% or more than the existing bank rate. One also needs to factor in the cost of shifting the loan because usually a processing fee of 1% is charged by banks on the outstanding principal. One should only consider switching loans if savings due to the lower interest rates are higher than the costs that are involved for shifting loans to another bank. One needs to find out the total expected savings and the outstanding loan amount and remaining loan tenure. If the remaining tenure is higher, say about ten years, then the 1% reduction will amount to considerable savings in the long run.
It is important to talk to one’s current lender to find out whether the home loan rate can be reduced or not and most banks will be ready to negotiate once you inform them about your transfer plans. The relationship manager of the bank can be approached for negotiating this rate reduction. In cases, even if the shift has been made to a new lender with lower rates, the future rate reduction might be slow with the new lender as well. This is due to the reset clause and banks also usually align the reset period of MCLR based loans with that period. The one year MCLR is usually reset after a year and assuming one shifts to be a new lender and get a good rate of 8.55 as compared to 9.65% that the borrower had to pay with the previous bank, because of the clause, the loan rate will not come down till April 2020 even if the bank cuts the MCLR to 8.4%.
How to cope with rising Home Loan Interest rates?
- It is important to assess one’s outstanding debt and even apart from the home loan, one might have a few other debts like a car loan or some personal loans. Even credit card debts matter and when the interest goes up, it is important to make a list of all the debts and prioritize them. Pay them off as soon as possible so that in the future, you can devote the greater part of your salary towards the repayment of your home loan. A home loan EMI calculator will help you with the exact figures.
- The next step is to assess your investments and the savings and you should then aim to increase your returns from investments in such a manner so that it makes up for the extra EMI amount due to interest rate hikes. That way, you would not have to pay the extra money from your own pocket. Try to opt for stable and secure investment options like liquid mutual funds and short term debt mutual funds. Or you could lock some of your money in an FD and only use it to finance your EMIs when the time comes. Enlist the assistance of an investment advisor to help you with these matters.
- Making the right strategy for the repayment of your home loan depends on which stage of repayment you are currently in. Have you neared the end of the tenure and there is only about a year or two left? In that case, a year’s struggle will hardly matter because by the end of the tenure in a regular term loan, the greater part of the EMI consists of the principal amount and the interest hike will not be too much of a problem. Moreover, higher interest will also result in higher tax deductions so you end up saving some money either way.
- While making the transfer, it is important to take care that the remaining repayment period is more than five years or there isn’t much benefit to be had while switching the home loan. This is because the processing fees and other charges will cut into your benefits. Try not to opt for loans which offer a lower rate for a short time period as they tend to increase the rate considerably after the offer period ends.
- Try to make timely EMI payments as the loan transfer will not work with irregular payments. Your new lender might not want to take on your loan if your repayments were irregular with your previous lender. You should also get a statement from your lender to avoid future hassles and it should state that the property documents will be dispatched within a particular time frame.
- You also need to keep in mind that the new lender will not charge any foreclosure penalty for closing the loan earlier than the stipulated time. Try to negotiate and bring down the processing fee for the home loan transfer. With banks like SBI, the processing fees for home loan transfers have been waived off currently.
With these points being considered, you will be able to transfer your home loan to a new lender with ease.