It is good to see that the earning capacity of the youngsters have increased with time and they no longer have to wait till their 50s to earn enough to be able to afford their own home. This is largely made possible because of the easy availability of home loans and one can choose a long tenure of up to 20 or 25 years to pay off the loan. However, there is one thing to contend with- and that is the sudden hike in home loan interest rates that happens from time to time. The latest repo hike of 25 bps by the RBI had come just after prominent banks had hiked their MCLR or the Marginal Cost of Funds Based Lending rates. The bottom line is that the EMIs would go up and one should try to look at a few things to cope with this climbing rate.
It is important to assess one’s outstanding debt and even apart from the home loan, one might have a few other debts like a car loan or some personal loan. Even credit card debts matter and when the interests go up, it is important to make a list of all the debts and prioritize them. Pay them off in a lump as soon as possible so that in the future, you can only devote the greater part of your salary to the repayment of your home loan. A home loan EMI calculator will help you with the exact figures.
The next step is to assess the investments and the savings and to increase your returns from investments in such a manner so that it makes up for the extra EMI amount caused due to interest rate hikes. That ways, you would not have to pay the extra money from your own pocket. Try to opt for stable and secure investment options like liquid mutual funds and short term debt mutual funds. Or you could lock some of your money in an FD and only use it to finance your EMIs when the time comes. Enlist the assistance of an investment advisor to help you with it.
Making the right strategy for the repayment of home loan with increased debt also depends on which stage of repayment is one in. Have you neared the end of the tenure and there is only about a year or so left from your fifteen year tenure? In that case, a year’s struggle will hardly matter because by the end of the tenure in a regular term loan, the greater part of the EMI consists of the principal amount and the interest hike will not be too much of a problem. Moreover, higher interests will also result in higher tax deductions so you end up saving some money either way.
Or are you in the early or in the mid- stage of your loan? In that case, try to make a part- prepayment of the loan as soon as you find yourself in possession of some extra cash- like a bonus at work. In that case, the principal amount comes down and the interest that is being paid on it. Even if the rates increase, this will balance each other out and you will be more or less the same amount as EMI, depending on how much you pre-paid.
If all else fails, try to transfer your home loan balance to another bank via Home Loan Transfer and NBFCs like Bajaj Finserv have very good options for it. You can easily make the change for better rates and you will not have to end up paying too much extra if the new lender is offering lower rates.