Recent data reveals that retail inflation has reached a 14-month high. Despite this, the Reserve Bank of India (RBI) has maintained the repo rate at 6.5% for the past decade. This has surprised many individuals who were anticipating cheaper home loans.
The State Bank of India (SBI) has already hinted that there’s little chance of an interest rate cut during the Monetary Policy Committee (MPC) meeting scheduled from December 4 to December 6, 2023. It’s expected that the repo rate will remain at 6.5%.
Impact of Rising Interest Rates on Home Loans
Between May 2022 and March 2023, the RBI increased the repo rate multiple times. As a result, home loan EMIs or tenures for many borrowers have increased. While some individuals have already planned their finances to counter these changes, others are still waiting for interest rates to drop. Whether you already have a home loan or are planning to get one, here are key points to consider for saving money:
1. Opt for a Shorter Loan Tenure
Experts recommend keeping your loan tenure as short as possible to reduce the interest burden. The longer the tenure, the more you’ll pay in interest. For example:
- A ₹50 lakh loan for 10 years at 9% interest will cost approximately ₹26 lakh in interest.
- For 15 years, the interest increases to ₹41 lakh.
- For 20 years, the total interest shoots up to ₹58 lakh.
Choosing a shorter tenure significantly reduces the total repayment amount.
2. Increase EMI Payments Gradually
For many young borrowers, a shorter tenure may seem challenging due to higher EMIs. If you opt for a longer tenure of 15-20 years, consider increasing your EMI payments as your income grows.
- Increasing your EMI by 5% annually can reduce a 20-year loan tenure by almost 8 years.
- A 10% annual increase in EMI can help you repay a ₹50 lakh loan at 9% interest in just 10 years.
This approach ensures faster repayment and minimizes interest outflow.
3. Consider Insurance for Financial Security
When taking a home loan, it’s essential to understand the insurance options offered by lenders.
- Banks often provide linked insurance policies, but these have limitations, such as non-transferability if you switch lenders.
- To ensure comprehensive protection, opt for term insurance alongside your home loan. Term insurance offers consistent coverage irrespective of lender changes, providing greater security for your family.
4. Understand the Link Between Interest Rates and Benchmarks
Most floating-rate home loans are linked to external benchmarks like the RBI’s repo rate, which currently stands at 6.5%.
- Lenders adjust interest rates during specific reset periods (quarterly, semi-annual, or annual).
- Before choosing a loan, evaluate the frequency of rate adjustments and select one that quickly reflects changes in benchmark rates.
Additionally, maintaining a strong credit score can help you secure better interest rates.
5. Opt for a Joint Loan for Tax Benefits
If your spouse is employed, consider taking a joint home loan to maximize tax benefits.
- The government allows a deduction of up to ₹2 lakh per person on interest paid under Section 24(b) of the Income Tax Act.
- For instance, with a ₹50 lakh loan at 9% interest for 20 years, the annual interest amounts to approximately ₹4.5 lakh. Jointly claiming tax benefits can significantly reduce the financial burden.
Final Thoughts
Managing a home loan effectively requires careful planning and strategic financial decisions. Whether it’s selecting a shorter tenure, gradually increasing EMIs, or leveraging tax benefits through a joint loan, these tips can help you save lakhs in interest payments while ensuring financial security.