In the past few months, the apex banking institution of the nation – The Reserve Bank of India, has increased the repurchase rate by a total of 50 basis points, thus raising it to a high of 6.50. As a result, Home Loan Interest Rates have also witnessed a hike of about 0.25 to 0.70 basis points. Needless to say, this hike will impact the finances of borrowers across the nation, especially those with significant credits under their names such as a home mortgage.
Let us understand how exactly this hike will impact your finances.
If you have been looking forward to procuring a new credit, especially something as significant as a Loan Against Property, you might have to settle for a higher Home Loan interest rate than you initially planned to. You can either combat this by asking for a longer tenure or purchasing a house which is cheaper, to begin with.
If you have a floating rate interest loan, the rise in MCLR (Marginal Cost of Funds Based Lending Rate), will imply a consequent rise in the interest rates. This, in turn, will result in higher equated monthly instalment (EMI). While the increase in EMI per se, may not be as high as to severely impact your finances, but when seen in the long run it may result in significantly higher interest outgo.
The higher base rate will result in everyday items getting costlier. This will result in a subsequent increase in your day-to-day expenses. Considering your income will not increase in the same proportion, this inflation in rates will cause a little strain on your finances.
The present-day situation of increase in repo rate, accompanied by the weakening currency has led to a rise in the cost of import of gold. This will likely result in a hike in gold prices, thus further impacting the financial situation of those who are looking forward to investing in gold or simply to purchasing it for religious or customary purposes.
Given the rise in EMI as well as in household expenses, it wouldn’t be wrong to say that your annual savings might witness a dip. If like most Indians, a large chunk of your savings goes to deposits you may lose out on the returns. However, if you invest heavily in equities and mutual funds, you may, in fact, revel in increased returns. Your savings that go towards pension funds, insurance, and other long-term assets will, more or less, remain unaffected by the changing trends.
If you want your dream house and are not prepared to compromise on the property, a good way to minimise the impact of the increased Home Loan interest rate, is to secure a higher down payment. While this may be a little tricky to manage, but it would prove to be financially beneficial in the long run.
If you believe that you wouldn’t be able to make ends meet due to the rise in your Home Loan EMI, you can get in touch with your lender and place a request for restructuring the loan. Through this measure, you can possibly extend your tenure, thus keeping your EMI same as before.
Then again, you have the alternative of Home Loan Balance Transfer(HLBT), wherein you can shift your loan to a bank with better terms and a lower rate. This is, however, only feasible if you are still in the early stages of your housing loan repayment as HLBT often involves numerous additional charges such as prepayment penalty, processing fee, legal fee, and documentation fee amongst others, which may balance off the benefits if done at a later stage.
If you have an excellent credit history, you may also check with your lender, about paying the same rate as earlier. If the lender is keen on holding on to your business, it might accept your offer.
If on the other hand, you are in a good financial situation and have enough savings on your side, you can opt to prepay your loan, and save on the otherwise increased interest outgo.
We hope that you now have a clear idea regarding the impact of rising interest rates on your personal finances, and how you can deal with the same. If you still feel uneasy about the new changes, we suggest you meet with your financial advisor and discuss the plausible effects and ways to combat the recent rise in interest rates.
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