14 JANUARY, 2022

Depending on the market policies, RBI’s mandate, economic policies, social events etc., the home loan interest rates keep changing. When there is a hike in housing loan interest rates, it increases the EMIs and total cost of borrowing of borrowers. Often, availing a home loan is the only option for many people to buy their dream home and so any change in the interest rates affects their budget too. Have you wondered how homebuyers deal with them?

Here are some tricks that homebuyers use to protect themselves from interest hikes, and you can try them too.

How are Housing Loan Interest Rates Determined?

The housing loan interest rates are of two types - floating and fixed. As the name suggests, the fixed interest rates are constant for the entire tenure. On the other hand, the floating interest rates fluctuate during the tenure based on different benchmark rates like repo rate; Marginal Cost of Funds based Lending Rate, repo rate, etc. Typically, lenders prefer floating interest rates home loans, and very few of them offer housing loans with fixed interest rates.

How to Deal with an Interest Rate Hike?

  • Regular pre-payments

The best way to save money on home loans is to prepay your home loan whenever possible. Typically, the initial EMIs of your home loan includes more of the interest component and less of principal. Thus, when you pay a part of the loan, your interest burden is also reduced. Instead of using the extra funds to invest in low-yielding deposits or investments, you can make frequent part payments. You can use the amount received from bonuses, salary hikes, or other ancillary incomes. Moreover, there is hardly any interest or fee for prepayments. Therefore, you must strive to pay more than the EMI whenever you can.

  • Ask for restructuring of EMI

Lenders do not immediately increase your EMI when there is an increase in interest rates. They can increase either the EMI or tenure. You can choose between the two to ensure that it does not hamper your finances. If you can afford it, you can go for an EMI increase. Alternatively, if your lender allows, you can revise the EMI whenever you get an appraisal. You will be able to pay off the loan faster and save on interest outgo.

  • Opt for a home loan balance transfer

Interest rates are based on your profile as well. This is why it differs from lender to lender. Therefore, if you find a lender offering lower interest rates than the one you are servicing, you can transfer your home loan. However, you must ensure that there is a difference of at least 50 bps so that you have enough savings and can justify the switch after considering the cost of the transfer.

When there are constant fluctuations in the housing loan interest rate, you need strategic planning to keep your finances in check. You can use these tricks to deal with the hike. However, home loans are long-term commitments and you should not panic with interest rate hikes immediately.

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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.