The Reserve Bank of India (RBI) has increased the repo rate, which is the rate at which banks borrow from the Central Bank, by 2.25 percentage point to 6. 25 per cent yesterday, keeping on track a policy since May 2022. Banks have also fully transmitted the rate hike to home loan borrowers leading to a steep rise in lending rate over the period of just 7 months. Consider this: Your total EMI has increased by Rs 7,000 in the span of just seven months assuming a 20-year-loan of Rs 50 lakh at the original interest rate of 6.72 per cent.
In such a scenario when home loan rates have crossed the mark of 9 per cent, the home loan tenure of many borrowers have already crossed the working age of 60 years. Given the steep rise in the tenure of loans, which is the default option opted by banks when the lending rates rise, it is important that you reduce the cost of your home loan. Moreover, with the stock markets also turning volatile the opportunity cost of investing your money somewhere else has come down.
Hence, here are some of the effective ways to save the interest cost and reduce the tenure of your home loan:
Refinance with your own lender
The first thing you should do is ask your lender for a lower rate. It is recommended to check with your own lender as it is cheaper and there is no paperwork. Here you will be required to pay the processing fee, which is generally a few thousand rupees. A difference of 50 basis points warrants a look for refinancing your home loan.
Refinance with another lender
If you have taken a loan from NBFCs chances are high that your loan is costly. In such cases borrowers can look forward to transfer their home loan for lower interest outgo with another lender. But before refinancing, one needs to understand the pros and cons. For example, if one wants to shift to a new financier, one needs to calculate the net savings, not just the interest rates. There will be charges like processing fees, legal fees, Memorandum of Deposit (MOD) charges and administration fees. But the brighter side will be interest savings reducing the cost of your home loan.
Pay higher EMI
You can visit your bank and complete the formalities for voluntarily paying a higher EMI. Here the bank doesn’t charge you anything and in lieu of higher monthly outgo your loan gets paid off faster. But opt for it only if you have some extra money in your wallet as with an already stretched budget this might not be a good idea.
“If you increase your EMI by 5 per cent every year, you can finish your loan in less than 13 years (assuming 20-year tenure). A 10 per cent increase in your EMI every year can close your loan in about ten years,” says Adhil Shetty, CEO, BankBazaar.com.
Pay one extra EMI once a year
If you cannot commit to pay a higher EMI every month, try to pay one extra EMI once a year. By pre-paying an extra EMI at the start of every year saves you interest cost. “Prepaying one additional EMI every year can close your loan in just 17 years,” says Shetty.
Pay 5 per cent of loan balance yearly
Another easy approach is to pre-pay 5 per cent of the loan balance once every 12 months. The simple approach can help you to pay off loans faster. “Prepaying your home loan as and when funds are available can do wonders and shorten your ballooning loan tenor. For example, if you pay 5 per cent of the loan balance every year, you can pay off your 20-year loan in 12 years,” says Shetty.
Pre-close if the rate is too high
If you think that your rate of interest is very high and refinancing is not an option, then you always have the choice of fully pre-paying the loan. It not only saves the interest income but also protects you from financial stress.
Also Read: RBI's repo rate hike: Home loans set to get costlier
Copyright©2023 Living Media India Limited. For reprint rights: Syndications Today