Recently, the Reserve Bank of India has increased the interest rate on home loans twice in a short space of time. In addition to this, it is expected that there will be another hike of 25 points in the repo rate. This has prompted private banks like ICICI to increase theinterest rates for the home loan by 15 basis points on both the 6 month and 1 year scheme. Government owned banks such as SBI have also increased the interest rate from 8.25% to 8.45%. This is an increase of 20 basis points.
For the borrowers who have opted for the floating interest rate mode of repayment, the varying interest rates can be a real worry as any increase would directly mean paying extra money on the EMI amount every month. There are some steps that can be taken to decrease the home loan burden when there is a hike in the interest rate. They are:
- Making partial prepayments: Making partial prepayments is one of the steps that can be taken by the borrower in order to decrease the EMI burden in case there is hike in the interest rate. Making prepayments can reduce the EMI or the loan tenure. The amount of money that can be prepaid depends on the monthly income of the borrower.
- Making prepayments by reducing the tenure of the loan: For instance, if the borrower decides to pay the amount that was to be paid during a period of 5 years in a 20-year loan tenure, the prepayment will reduce the home loan burden massively as the borrower will be able to save interest on the prepaid amount.
- Reducing the EMI: Instead if the borrower goes through with the option of reducing the EMI, the burden of paying a huge chunk of your monthly income as EMI would be reduced. It will in fact compensate for the money that was spent of prepayment of the loan amount.
- Transferring the home loan balance: Another method by which the borrower can reduce the EMI burden is by transferring the home loan balance to another bank which offers a lower rate of interest on it. Via this option, the borrower will able to save money by paying less EMI every month. The borrower can avoid draining of savings to pay the EMI every month.
- Investing in schemes that have high return rates: Instead of breaking the bank to pay the EMI every month, the borrower can invest money in schemes that have high rates of return. Some of the schemes which provide high returns include Mutual Funds, Direct Equity, Initial Public Offerings (IPOs), Equity Linked Savings Schemes (ELSS) etc. The return from the investment can help fund the EMI amount for the home loan. It also helps the borrower avoid the breaking of emergency funds to pay the EMI amount as it could leave him or her vulnerable in the future.