Buying a house is a significant financial decision for all who dream of owning a home. Opting for a home loan is a long-term commitment. You must carefully consider various aspects to ensure consistent repayment. A critical issue that can affect your loan is the fluctuating interest rate. Before taking out the loan, check CIBIL score free to understand if you would be able to negotiate a favorable interest rate with the lender. Since interest rates depend on the market conditions and the Reserve Bank of India adjusts them based on the economic conditions, you can face the issue of changing interest rates when you take out a home loan.
What Happens When Home Loan Interest Rates Change?
The interest rate of the home loan and the amount you need to repay are directly proportional. If the interest increases, the EMI will increase, and you will have to pay more. If the interest rate goes down, so does the EMI, and you will have to pay less interest. Thus, you need to monitor the interest rates to understand how their movement will affect your finances. Use a home loan EMI calculator and check the EMI every time the interest rates fluctuate.
Also, as you start repaying the loan, check CIBIL score free to stay updated on your credit status!
Impact of Changing Interest Rate Based on Home Loan
There are two types of home loans in terms of interest rates:
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Fixed-Rate Home Loans
The interest rate for a fixed-rate home loan does not change throughout the loan tenure. If you want to opt for a fixed-rate home loan, first check CIBIL score free. A good CIBIL score translates to a favorable interest rate. When the interest rate is fixed, you will pay the same EMI over the years.
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Floating-Rate Home Loans
If you have a floating-rate home loan, then the interest rate will change according to the market rate and conditions. Thus, changing interest rates affect floating-rate home loans the most.
What To Do When Interest Rates Are Rising?
Interest rates in India have been consistently on the rise for some time. To manage your home loans better, you can follow these tips:
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Increase the EMI Amount
Check CIBIL score free, and if your finances allow, you can consider increasing the EMI amount to reduce the overall interest outgo; this will also shorten the loan tenure. Calculate the increased EMI amount using a home loan EMI calculator while ensuring it does not strain your finances.
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Make Pre-Payments
Home loans usually have a feature that allows the borrower to partially or fully pre-pay the loan. If you happen to have surplus funds, maybe an FD matured, or you got a bonus, you can consider making a pre-payment to reduce the outstanding loan amount. When you reduce the loan amount, you end up paying lesser principal interest. However, keep in mind lenders often charge pre-payment penalties. Do a cost-benefit analysis to determine whether this is a plausible option.
If you choose to make a partial pre-payment, you can follow it up with two actions to ensure a reduced overall interest payment:
- Maintain a Constant EMI: To reduce the loan tenure, you can maintain the EMI you had been paying before.
- Maintain the Tenure: To reduce the EMI, retain the same loan tenure. Use a home loan EMI calculator to calculate the updated EMI.
Switch Lenders and Opt for a Balance Transfer
Suppose you have not been able to negotiate a favorable interest rate. In that case, you can also consider transferring the loan to a different lender who is open to offering a better rate. You can also change your home loan from a floating interest rate to a fixed rate to safeguard against future increases.
Conclusion
Fluctuating interest rates can skew your financial planning; thus, keeping an eye on changing interest rates is important. Remember to check CIBIL score free beforehand if you opt for a fixed-rate home loan. If you have opted for a fluctuating-rate home loan, then be prepared for changes in the interest rates and have a backup plan like the ones mentioned above to manage the impact effectively. If you want to ensure your home loan remains manageable, take active steps to ensure it does not exceed your limits.