Buying or building a home requires a substantial financial commitment, and most individuals’ need financial assistance for the same. The concept of home loans has helped people largely fulfil their dreams of having their own space and security.
Home loans help an individual own property and create capital assets, but they also create huge financial liabilities. During FY 2022–23, RBI has raised the repo rate from 4% to 6.5%, and the same has triggered a sharp increase in home loan rates too, for example, the SBI HL base rate has gone up from 7.4% in April 2022 to 9.15% in February 2023.
Home loan borrowers are shaken, and their cash flows have derailed due to such an acute increase within such a short period. Many borrowers are left without any choice and have opted for an increase in their home loan tenure, which has jumped from 20 to 40 years, and few are wondering whether they will ever become debt-free in their lifetime.
People who celebrated their prized possessions at the beginning of the calendar year 2022, are nowadays tensed and exploring options to overcome financial challenges and burdens due to an acute increase in interest rates.
The following are the key learnings or things to keep in mind for home loan borrowers with regular hikes in interest rates:
Cap home loan
The home buyer is stretching himself or herself to avail the maximum loan by opting for the maximum loan tenure as well as committing EMIs after budgeting minimal household expenditure. It is advised that a home loan borrower must judiciously budget expenses for a growing family's needs for at least the next three years and provide a minimum of 10% for contingencies to work out the eligible loan amount.
Avoid immediate additional borrowing
Any immediate additions to financial liability due to easy loan access for furnishing a home or acquiring a vehicle should be avoided until a commensurate increase in income occurs.
Limit obligations at the age of 58
Home loans are available for up to 30 years, and lenders are willing to extend tenure even up to 40 years due to the increase in interest rates. It is advisable that the borrower should close his financial obligations a few years before retirement to lead a peaceful and stress-free life during and after retirement.
Borrowers must use all lumpy cash receipts, whether they are bonus, incentive, liquidation of assets, fixed deposit maturities, or insurance policy receipts, to reduce home loan obligation. As we know, during the initial loan tenure, a larger part of EMIs is attributed to interest, and such pre-payments actually help in direct reduction of the principal.
Explore PF withdrawal:
Presently, interest on a home loan is higher than that on an EPF or PPF account, and a borrower with accumulation in his or her provident fund account can consider early redemption to partially prepay the home loan and avoid cash flow shocks due to the increase in interest rates.
Avail home loan insurance
Home loan insurance helps the borrower against any unforeseen event, such as death, disablement, or job loss. It settles the loan despite unfavourable circumstances, and it is advised that the borrower must insist on and opt for the same.
Avail the balance transfer or conversion facility
In the case of an existing home loan, the interest rate keeps moving in line with changes in the base lending rate of the institution or banks. Nowadays, lenders offer a competitive and better rate to lure new customers due to intense competition. The borrower should keep comparing his revised rate on an existing loan with the latest offerings from other institutions/banks.
In case of getting more than 50 bps in interest, you should consider moving to new financiers. In all probabilities, your financier will match the offer and guide to avail of the conversion/switching facility to reduce his interest obligation.
Jugal Mantri, Executive Director and CEO, Anand Rathi Global Finance