When you buy a home, you think of securing a favourable interest rate. This matters not only for existing homeowners but also for new buyers. Recently, most financial institutions have seen a significant shift as home loan interest rates have surpassed the 9 percent mark.
With the increase in interest rates, homeowners and buyers have to reassess their financial strategies, seeking ways to mitigate the impact of increasing equated monthly instalments (EMIs). While the surge in interest rates may seem daunting, it allows one to restructure their home loan via proactive financial planning and intelligent decision-making.
Take a look at how to optimise your existing loan structure to achieve your homebuying goal without worrying about EMIs.
Raj Khosla, Founder and MD, MyMoneyMantra.com says individuals on a tight budget and who do not have surplus liquidity can ask for an increase in the loan tenure as it will help maintain the EMI payments at par with the previous EMIs. Borrowers with surplus funds can part-prepay the loan, resulting in lower EMIs and thus parity with earlier EMIs, while keeping the loan tenure unchanged.”
Prepayment
Opting for prepayment can help reduce the loan tenure and overall interest payments. However, if one is nearing the end of the loan tenure, prepayment may not provide significant savings.
It would be better to consider any investment opportunities that can generate higher returns than the interest rate on your home loan. It may be more beneficial to invest additional funds instead of prepaying the loan.
In case of holding surplus funds, and a considerable loan tenure, one should consider partially prepaying the loan, which will reduce EMIs and keep the loan tenure unchanged.
“For example, you have taken a home loan of Rs 50 lakh at an interest rate of 7% for 20 years. Now, if you have surplus funds and make a part-prepayment of Rs 10 lakh, the remaining loan amount would be Rs 40 lakh. The EMI for this reduced loan amount would be lower than your previous EMI. Assuming your previous EMI was Rs 38,765, with the part-prepayment of Rs 10 lakh, the new EMI would be approximately Rs 35,989. This is lower than the previous EMI and helps you maintain parity with your earlier EMIs while keeping the loan tenure unchanged,” explained Khosla.
Opt for a Home Loan OD
Another option to prepare for a rate hike is to opt for a Home Loan Overdraft (HLOD) facility. With this facility, one can deposit a lump sum amount in the savings or current account linked to your home loan account. If one receives a bonus, a large payout, or an exceptional hike, depositing this money in the HLOD account can help one take advantage of the situation.
The deposits will be considered prepayment or part-payment against the home loan and interest will be charged on the net amount outstanding.
There is one more option of continuing the ongoing EMI at 7% interest, i.e., an increased tenure.
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Increase the tenure of your home loan
In the case of a budget deficit and not having surplus funds, one can request an extension of the loan tenure to keep the EMI payments at the same level as they were before.
“For instance, let’s say you have a home loan of Rs 30 lakh at an interest rate of 7% for a tenure of 20 years. Your EMI would be around Rs 38,765. As the interest rate has been hiked by 2% (from 7% to 9%), your EMI would also increase to Rs 44,986. To avoid this increase, you can request to extend the loan tenure to 38 years, keeping your EMI at Rs 38,765,” said Khosla.
However, this is not an ideal option as it will increase the overall interest burden. “You will end up paying a huge interest amount on your loan amount. Furthermore, most of the banks do not extend loan tenor beyond 30 years,” said Khosla.
