What to Do When Home Loan Interest Rate is Increased

An increase in home loan interest rates can put a severe strain on your monthly financial commitments, particularly for those with existing home loans or contemplating getting one. But that should not stop you from owning your dream home. It’s crucial to recognize that there are proactive steps you can take to handle this situation effectively. In this guide, we explore practical tips to reduce the payable home loan interest and 

What is Prime Lending Rate and How Does it Influence the Increase in Home Loan Interest Rate?

Before we delve into the ways to tackle rising interest rates on home loans, let’s understand what the Prime Lending Rate (PLR) is. PLR is an internal reference rate that NBFCs (Non-Banking Financial Companies) and HFCs (Housing Finance Companies) set for floating rate home loans. It serves as a reference point for interest rates on various loan products, including home loans.

While the PLR does not directly determine the interest rate on your home loan, it does play a significant role in influencing it. Let’s look at how the PLR affects the home loan interest rate.

•   According to RBI directives, lending institutions must adhere to a PLR not lower than the RBI-set "base rate."

•   PLR is determined by banks' management, factoring in operating expenses, capital charge margins, and funding costs.

•   These elements collectively establish the "Spread," which represents the additional cost over the base rate.

•   The customer's final interest rate is computed by incorporating the Prime Lending Rate alongside the Spread.

•   The formula for Home Loan Interest Rate based on PLR is: Interest Rate = (Spread + Prime Lending Rate).

8 Tips to Reduce the Impact of an Increase in Home Loan Interest Rate

Now that we have understood what PLR is, let’s explore different methods to reduce the impact of rise in home loan interest rates.

Choose a Shorter Tenure

The home loan tenure is one of the main factors that impact the overall interest amount. The longer the tenure the higher the interest amount that you are required have to pay. On the other hand, the shorter the tenure, the lower the interest amount that you are supposed to pay.

You can use our home loan calculator to understand how shorter tenure reduces the interest amount flow. Hence, choose the tenure so that you don’t end up paying higher interest amount against your loan.

2.  Opt for a Suitable Interest Rate

Home loans can be offered either on fixed or floating interest rates. Fixed interest rates remain constant throughout the loan tenure, while floating interest rates fluctuate, depending on market conditions.

Generally, floating interest rates are lower than fixed rates, making them a more cost-effective option in the long run. Choose the interest rate that aligns with your financial conditions.

3.  Try to Make Prepayments

For loans with floating interest rates, prepayment or loan foreclosure penalties are not applicable. That is why you should aim to make periodic prepayments on your loan. This is because you make more interest payments in the initial years of your loan than you do towards the principal balance.

Prepayments significantly reduces the loan amount and the amount of interest that would be charged overall.

4.  Negotiate with the Lender

When you are planning to get a home loan, it is important to bargain for a lower home loan interest rate. This would help reduce the overall interest amount. If you have a good credit score, steady income, and a history of making timely payments, don't hesitate to negotiate.

Building a good relationship with your lender can be beneficial. You can also use your existing relationship with the bank, such as having a salary account or a long-standing savings account, to secure a better deal through negotiation.

5.  Increase Your Down Payment

A down payment is the money you pay upfront to a contractor or builder when you get a loan. It is incredibly important because it affects the interest rate on the rest of the money you borrow.

A higher down payment also tells the lender that you're serious about repaying your home loan, making you a less risky borrower. If you can, consider making a bigger initial payment to cut down on your overall home loan interest amount.

6.  Consider Home Loan Balance Transfer

If you feel the interest rate of your current lender is marginally higher than some of the competitors, then you should consider transferring your home loan to a lender offering a lower interest rate. This is known as the balance transfer of a home loan. This process reduces the interest amount flow towards to home loan since you are paying a lower interest rate.

Besides, some lenders offer a top-up home loan when you opt for a balance transfer, and the amount depends on the value of your property. Just ensure that costs associated with the balance transfer do not overshadow the benefit of a lower interest amount.

7.  Increase Your EMI

Some lenders offer you the choice of increasing the Equated Monthly Instalment (EMI) annually. Opt for this option if your income has increased. This results in shorter tenure and a reduction in the overall interest amount.

8.  Consider Your Investments and Savings

Increasing savings and reducing debt should be your priority in dealing with unexpected increase in home loan. This acts as a cushion with an access to extra funds which can be used to prepay or reduce your monthly cash flow when home loan interest rises.

Conclusion

Rising home loan interest rates can be stressful, but strategic planning can help. This guide explored methods to minimize the impact, including opting for a shorter loan tenure, choosing the right interest rate, making prepayments, and negotiating with your lender. 

Additionally, increasing your down payment, exploring balance transfers, and adjusting your EMI (if possible) can offer further relief. Remember, prioritizing savings and managing debt strengthens your financial resilience in such situations. By being proactive, you can navigate these challenges and achieve your homeownership goals. 

FAQs

Here are some commonly asked questions about increase in home loan interest rates:

1. How can I assess the impact of the home loan interest rate increase on my finances?

These factors significantly affect your finances:

•   Higher costs for new loans

•   Increased EMIs

•   Elevated household expenses

•   Decreased gross financial savings

2. Should I consider refinancing my home loan?

Yes, you can consider home loan refinancing in scenarios like decreased interest rates, changing loan types, shortening loan tenure, reducing EMI amounts, seeking improved terms or service, and when there's a requirement for additional funds.

3. Can I negotiate with my lender for a lower interest rate?

Yes, you can negotiate for a lower interest rate during the application stage based on your credit score, repayment history, and the method of interest calculation.

4. How can I make extra payments to reduce my interest costs in home loan?

You can pre-pay the EMI(s) to reduce the overall interest costs of your home loan. Making additional payments will lower your total loan repayment thereby reducing the overall interest cost.

5. What factors should I monitor to stay informed about rate changes?

Some of the factors that may impact the home loan interest rate change are change in MCLR, the type of interest (fixed/floating), credit score, Loan-to-Value (LTV) ratio, home loan tenure, property location, down payment and your employment status.