16 JUNE, 2022

The period of low home loan interest rates has come to an end now that the Reserve Bank of India (RBI) has increased the repo rate. Earlier in May, in an attempt to curb inflation, RBI increased the repo rate by 40 basis points. Several lenders have already mimicked this by raising their housing loan interest rates or are planning to. A rise in the home loan interest rate means that the cost of borrowing or the cost of buying your home soars. As a home loan borrower, there are a few things you can do to beat the rising housing loan rates in the country.

  • Prioritise part prepayment

If you have money parked in fixed deposits, mutual funds, or other investment avenues, you can consider using those funds to prepay a part of your home loan. Debt repayment needs to take priority over investing so that you can reduce your home loan interest outgo. Also, the current interest rates on fixed deposits are quite low so you can better utilise that money by decreasing your debt obligation. By prepaying a part of your home loan, you will be able to save on the interest payments either through an Equated Monthly Instalment (EMI) reduction or a tenure reduction.

  • Increase the EMI amount

You can also consider increasing your EMI for the time being. Experts believe that while the home loan interest rates are set to increase, they will remain comparatively lower in the near future. Hence, you can consider increasing your EMI for the next 12 to 18 months. This will allow you to reduce the impact of interest rate hikes in the future.

  • Consider other lenders

Take some time and check what housing loan interest rate is being charged by other lenders. If you find that there are lenders who are offering competitive rates despite the interest rate hike, consider a balance transfer. It’s important to undertake a cost-benefit analysis before you opt for a housing loan balance transfer because you need to make sure that the amount of money you save in terms of interest ends up being more than the charges you incur to transfer your home loan.

  • Leverage improved credit score

If your credit score has improved since the time you took out your home loan and you have been diligent with paying your EMIs, then you can consider bargaining for a lower rate with your existing lender. The improvement, however, needs to be substantial enough to be considered. You can also leverage increased income or enhanced job profile.

  • Optimise your investment portfolio

Another way to beat the rising housing loan rates is by increasing your investment income. Given the current global volatility, experts believe that it’s a good time to make strategic investments in the stock market as the golden rule of investing is to buy low and sell high. Moreover, it’s essential that you invest your money in a way that beats inflation. If you simply let your money sit idle or invest in low-return investment products, then essentially the value of your money is being eroded with time. Hence, it’s important to invest in stocks and mutual funds that can help you earn returns higher than the current inflation rate and hence offset its impact. Another thing to focus on is diversification to hedge different types of investment risks. It’s important to invest across different asset classes so that your portfolio is not vulnerable to hits any one asset class takes. For instance, asset allocation across debt, equity, gold, etc., in a proportion that matches your risk appetite and financial goals is important.

The bottom line

Despite the rising housing loan rates, you can figure out ways to reduce your interest burden and simultaneously increase your wealth. So, if you are an existing home loan borrower and have been fretting about interest rate hikes or are someone considering whether you should or should not buy a new home given the current scenario, you can rest assured because with some thoughtful financial planning and smart moves, you can beat the rising interest rate environment.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.