The recent 90 basis point hike in the Repo rate and other key rates by the world’s major central banks confirms the signs of the return of the interest rate hike regime. Given the scenario, home loan borrowers should expect a further increase in their EMI amounts, and the overall cost of interest will also increase accordingly. Those who are unwilling to opt for higher EMIs will likely choose to increase their repayment tenure, which would incur even higher interest charges for them.
Going forward, as expected, there would be an ongoing reduction in interest rates, and the same trend will be on the rise. There is also a lot of dilemma for new home loan borrowers and also existing ones on how to approach this situation and still save money while going ahead with the loans. Here are some tips for new and existing home loan borrowers on how to reduce their burden of additional interest charges:
For new borrowers –
In line with guidelines issued by the RBI, lenders are now eligible to finance up to 90% of the actual cost of the property under any home loan scheme, depending on various other factors. Taking into account the cost, the proportion of the actual amount financed by the loan is known as the loan-to-value (LTV) ratio. In various cases, the ratio ranges from 50 to 90 percent, with borrowers contributing the remaining amount as a down payment or marginal contribution.
While generally speaking, borrowers usually prefer loans with higher LTV ratio as it makes it easier to down payment, while on the other hand, opting for loans with lower LTV ratio has its own advantages. Breaking down the LTV for better understanding, we can suggest that a lower LTV ratio for the same repayment term would result in lower interest charges and lower EMI amount. Additionally, a lower LTV ratio also reduces overall credit risk, increasing the chances of home loan approval. However, just to reduce the LTV, borrowers should avoid using their emergency funds or investments just to make higher down payments.
Extended repayment term
When availing a home loan, a new borrower can also opt for a longer loan repayment tenure which would reduce the burden of EMI on the borrower. In addition, a longer repayment term can also increase the borrower’s ability loan eligibility due to lower monthly expenses net of interest. However, a longer repayment term increases the overall interest cost, so borrowers should consider making partial prepayments whenever they have excess funds over the repayment period.
Compare offers with potential lenders
A home loan involves various factors such as interest rate, applicable processing fees, repayment term and loan amount, and they are not the same for every borrower and can vary significantly from lender to lender. other, which mainly depends on the overall cost of funds and the credit rating of the borrower.
Therefore, it is strongly advised that a new borrower compares all these factors when looking for a loan and that too from as many lenders as possible. To compare various offersa borrower can visit online financial markets and use EMI and Loan Eligibility Calculator to get the best deal based on their monthly income, credit score, employment profile and others eligibility criteria.
For existing borrowers –
Make regular advance payments
Most home lenders offer prepayment facilities to their borrowers to pay either the entire outstanding balance or part of it. The main purpose behind prepayment is to reduce the cost of accrued interest for borrowers. While making the prepayments, borrowers can choose between EMI or reduced tenure. Therefore, if they choose to reduce the tenure term, the interest charges would be higher than in the previous arrangement, and if they choose to reduce the EMI, the tenure term would be longer.
If the increase in EMI has a negative impact on a borrower’s financial situation, he should not sacrifice his monthly savings or his existing investments. Later, they will end up paying a higher interest rate to achieve these goals.
Advantage real estate loan Discovered
In recent years, lenders have come up with various credit products related to home loan. These days, most lenders offer a home loan overdraft facility referred to as a home loan advantage,and others that require a higher liquidity quotient. The advantage of this facility is that a borrower gets an open overdraft account where he can park the excess and can withdraw it according to his personal cash flow needs.
The average interest rate applicable on this facility is in the range of 3 to 7%, and the amount of interest is calculated after deducting the surplus of the savings/current account from the amount of the outstanding mortgage. Thus, borrowers have the advantage of making early repayments without compromising their liquidity position.
Home loan balance transfer
This is considered the most widely accepted way to save on your interest payments. Through this facility, an existing borrower can transfer their entire outstanding loan balance to another lender at a lower interest rate. This option is most suitable for borrowers who have a home loan at a higher interest rate and are now eligible for loans at lower rates due to a better credit rating or higher income.
However, an existing borrower should also conduct a thorough cost-benefit analysis of using a balance transfer, as they will require new documentation and may incur additional costs depending on the loan amount. Borrowers should only opt for a balance transfer if the savings in interest charges and/or other benefits outweigh the cost involved in transferring the loan.