Banks and NBFCs are lining up to raise their Home loan rates at the Marginal Cost of lending Rate (MCLR) which is being raised owing to the economic conditions and high inflation. The decision is not just from one bank but every lender including Housing Finance Companies.
Rising interest rates have an impact on the EMI value and the loan tenure. The decision is not at individual banks’ discretion but is influenced by the Reserve Bank of India’s decision to raise the repo rate, which through banks is passed on to the borrowers. The Repo rate is the interest rate at which banks borrow funds from the RBI.
With rising EMI values, it is difficult to clear the pending EMIs within the stipulated tenure. There are certain smart steps to keep your finances in control with long-term advantages in place.
Repay in time
One will face multiple penalties such as late payment and bounce charges for not paying EMIs on time. If you want to reduce your EMI or extend the tenure, you will end up paying additional charges which will again be a burden. It is advised to ensure continued repayment in a timely manner through Equated Monthly Installments (EMIs).
In these situations, Home Loan Balance Transfer wouldn’t even work. Every lender is taking a call on raising their MCLR liked interest rates. Trying to transfer the loan will have additional processing fees which will make it more expensive. And there is no guarantee that the new lender’s interest rate will remain at current rates which will definitely have future consequences provided current economic conditions.
Make intermediary payments if possible
Along with regular EMI payments, consider paying some part of the loan in one go at least once a few years. This will reduce your burden on principal amount repayment which will also help in reducing the tenure of the loan. Reduced loan tenure will ensure lower interest payments which will reduce the interest component in the long run.
Increase your EMI in a timely fashion
If unable to make intermediary payments, opt to increase your EMI repayment at regular intervals. This act will reduce your tenure and the interest component as well.
With a substantial rise in interest rates this year alone, the EMIs have been rising to add a burden on borrowers. There has been a 1.9% rise in MCLR rates this year alone. In order to compensate for this huge rise, some financial measures need to be taken by the repayer.
- Just paying off 5% of the loan balance once a year will bring a 20-year tenure to 12 years.
- Pre-pay aggressively if the loan interest rates rise to double digits.
Conduct proper research
Current economic conditions need to be watched closely. MCLR Interest rates have been hiked consecutively which collectively accounts for close to 20% in this year alone. It is not just internal parameters that affect the rates but also the prevailing economic conditions that drive the loan market.
Compare before borrowing
Owning a home is a good feeling. But, before investing in one, make a comparison of the different parameters of multiple lenders, especially the interest rates. Saving interest at the rate of 0.5% will save a lot of money over long tenures like 20-30 years.
| Principal Amt | Interest rate | Tenure | Interest value | Total Repayment |
| ₹25,00,000/- | 7.4% | 20 yrs | ₹22,96,938/- | 47,96,938/- |
| ₹25,00,000/- | 7.9% | 20 yrs | ₹24,81,364/- | 49,81,364/- |
| ₹25,00,000/- | 8.4% | 20 yrs | ₹26,69,027/- | 51,69,027/- |
Consider the example above of a Home loan of Rs.25,00,000/- principal with a tenure of 20 years. In the above example, you can observe that a difference of 1% interest rate will save Rs.3,72,089/-. A difference of 0.5% will save Rs.1,84,426/-on the interest repayment over the 20-year tenure.
This small comparison highlights the importance of interest rate comparison of different lenders and then selecting the one that allows you to repay the loan at competitive interest rates.
Conclusion
Every Home loan is linked to the MCLR (Marginal Cost of Lending Rate) which in turn to the economic conditions. This must be communicated to the borrower while availing the finance to fund their home purchase. Not every applicant gets this information beforehand. Money Mango is a DSA for Home Loans in Bangalore. If you are looking for an associate to help you find the best home loan, we have got you covered to get competitive rates. Connect with us today to get your home Loan application processed.
Source – Livemint
