PAYING HIGHER EMIS? KEY STRATEGIES TO REDUCE THE HOME LOAN INTEREST RATE BURDEN

Home loan interest rates have gone up significantly in recent years and many borrowers were expecting the rates to reduce this financial year, but the Reserve Bank of India kept the repo rate unchanged for the seventh time in a row in its monetary policy announcement this month.

For borrowers, high home loan interest rates can be a persistent concern. Despite fluctuations and policy changes, the anticipated drop in interest rates often remains elusive. However, there are several proactive steps that the existing borrowers can take to manage and potentially reduce the impact of high rates.

Review Your Loan

You must start by revisiting the terms and conditions of your existing home loan agreement. Understand the specifics of your interest rate, whether it’s fixed or floating, and any clauses related to rate revisions. Floating rates can fluctuate based on market conditions, while fixed rates remain constant throughout the loan tenure. Knowing these details is crucial in devising an effective plan.

Also Read: How to maximize tax benefits for senior citizens in India

Explore Refinancing Options

Refinancing your home loan means transferring your outstanding balance to another lender offering more favourable terms, including a lower interest rate. With the competitive landscape of lending institutions, refinancing can be a viable option to reduce your interest burden. Compare the current interest rates offered by different banks and housing finance companies.

Assess any associated costs such as processing fees, prepayment penalties, and legal charges. Calculate the potential savings over the remaining loan tenure to determine if refinancing makes financial sense.

Negotiate with Your Current Lender

Never be afraid to negotiate with your existing lender. Contact your lender and express your concerns about the high interest rates. Highlight your track record of timely payments, good credit standing, and loyalty as a customer. Request a reduction in your interest rate or explore options for a loan restructuring that aligns better with your financial capabilities.

Lenders value long-term relationships and may be willing to offer concessions to retain valuable customers. Be prepared to provide documentation supporting your financial stability and repayment capacity.

Consider Prepayment or Part-Payment

Making prepayments or part-payments towards your home loan principal can help reduce the outstanding balance and, subsequently, the interest payable. Utilise surplus funds from bonuses, savings, or investments to make lump-sum payments towards your loan.

Before proceeding, check with your lender regarding any prepayment penalties or conditions. Some loans may have restrictions on prepayments during specific periods or charge fees for early repayment. Evaluate the cost-benefit analysis to ensure that prepayment aligns with your overall financial goals.

Optimise Loan Repayment Structure

Review your loan repayment structure to identify opportunities for optimization. Switching from monthly to fortnightly payments can result in faster debt reduction and interest savings over time. Explore options such as step-up EMIs, where payments increase gradually over the loan tenure, reflecting income growth.

Adhil Shetty, CEO, Bankbazaar.com, says, “If your financial situation allows, consider increasing your EMI amount voluntarily. While this leads to higher monthly outflows, it accelerates loan repayment and reduces overall interest costs.”

Fixed vs Floating Rate

If you’re on a fixed-rate loan, analyse the current floating rate scenario. Historically, floating rates tend to be lower in the long run. Consult a financial advisor to understand the potential benefits and any exit charges for switching to a floating rate, considering the current high-interest rate environment.

Increase EMIs

If your income allows, consider increasing your monthly EMI. This reduces the overall interest payout and shortens the loan tenure. However, ensure this additional financial commitment doesn’t strain your budget in other crucial areas.

Maintain a High Credit Score

A good credit score unlocks access to better loan deals in the future. Make timely payments on your home loan and other debts to maintain a healthy credit score. This might be useful if you consider refinancing or require additional funds in the future.

“You credit score is crucial in helping you getting cheaper funds even when the rate is high as lenders often value customers with good track record. A credit score of above 750 is going to work in your favour and help you negotiate for a lower rate loan,” says Shetty.

You need to remember that every borrower’s situation is different. So, tailor these strategies to align with your financial goals and constraints. By taking decisive actions and seeking expert advice when needed, existing borrowers can navigate the high-interest rate environment more effectively and work towards achieving financial stability.

2024-04-11T05:03:30Z dg43tfdfdgfd