Some of the leading banks in India, have recently hiked their interest rates on many lending products, including home loans. The rise in crude oil prices, inflation, global tension and fall in the value of the Indian rupee against foreign currencies, could be some important reasons, which may fuel a further rise in interest rates in the coming months.
“A recent analysis conducted by the Reserve Bank of India (RBI), highlighted a gap between the growth rate of bank loans and deposits. Banks are careful about hiking deposit rates, to avoid any corresponding increase in the lending rates, especially at a time when credit growth has witnessed a revival,” says Shubika Bilkha, business head of the Real Estate Management Institute (REMI). For an existing borrower or a prospective home buyer, there is a real prospect of increase in interest rates. Under such circumstances, there are several ways to counter this rise in home loan interest rate.
1. Prepaying the home loan
Most banks do not charge any prepayment penalty on the home loan. If you have surplus income, then, you can start paying extra EMI. This could save you lots of money, if interest rates increase. Let us understand the concept, with the help of an example.
Prepayment benefit when there is chance of interest rate increase
| Details | Outstanding loan amount (in Rs) | Remaining tenure of the loan (years) | Interest rate in the first 12 months | Prepayment | Interest rate after 12 months | Total interest paid in 20 years (in Rs) |
| Case 1 | 30,00,000 | 20 | 8.50% | NIL | 9% | 34,59,172 |
| Case 2 | 30,00,000 | 20 | 8.50% | Rs 10,000 per month for 12 months | 9% | 33,18,301 |
| Difference | (A) | 1,40,871 | ||||
| Amount prepaid | (B) | 1,20,000 | ||||
| Amount saved by prepaying the loan | (A-B) | 20,871 |
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See also: With banks increasing MCLR rates, what should home loan borrowers do?
2. Buying a home immediately
Experts believe that delaying the home buying decision, can be counter-productive on your personal finance. Inflation works continuously and erodes the value of your money. So, if you repeatedly delay your home purchase, then, you may need to pay more for buying the property. Interest rate fluctuation is a cyclical process and in the long term, the highs and lows of the interest rate are averaged out. So, your cost of borrowing may not change substantially.
3. Switch to a fixed rate home loan
If you strongly believe that the interest rates may increase, then, you can switch your floating rate loan to a fixed rate one. Normally, banks offer fixed rate loans with tenure up to 10 years. However, the interest rate on a fixed rate loan is a little higher than a floating rate. If your remaining loan tenure is below 10 years, then, you can easily freeze your EMI liability, by opting for a fixed rate loan. It is important to note that you may not need to pay a penalty, while switching from a floating to a fixed rate loan but if you want to switch back from a fixed rate to a floating rate loan in the future, then, the bank may charge a penalty.
“If there is a hike in interest rates, there will be a hike in interest on deposits, as well. This would balance out the additional outgo towards servicing a home loan. A few Indian banks have already raised interest rates on deposits,” points out Sunil Agarwal, FRICS, associate dean and director, school of real estate, RICS School of Built Environment, Amity University.
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