How to prepare financially for a rise in mortgage interest rates in the future

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The chances of a further rate reduction are very low. However, mortgage borrowers should not ignore the possibility that rates will rise from current levels. Since rate transmission is now fluid, any rate increase by RBI will immediately impact their mortgage rate. Any increase in mortgage rates will increase the EMI (or loan term) and could mess up your financial planning.

For example, the EMI for a 20 year home loan of Rs 1 crore will be Rs 75,739 at 6.7%. The same will go up to Rs 81,787 at 7.7% and will rise to Rs 88,052 at 8.7%. The best thing to do in such situations is to go for fixed rate loans. However, the options are very limited and only a few options offer fixed rates also for a limited period. More importantly, these partially fixed rate home loans also charge higher interest rates.

Partially fixed loans will cost you more

Consider the additional costs before opting for partial fixed loans.

While these rate increases are not in your hands, you can prepare for them by assuming a higher interest rate. “Instead of the very low rates currently, assume a reasonable mortgage rate of around 8.5% and always invest the remaining EMI elsewhere,” says Aparna Ramachandra, Founder and Director of Rectifycredit.com. For example, the EMI for a 20 year home loan of Rs 1 crore is Rs 86,782 @ 8.5% and will be Rs 75,739 @ 6.7%. You should invest the difference of Rs 11,043 in a short term debt fund each month. This corpus will serve as a backup if prices go up. You will be in a better position even if the rate does not increase because this money will be saved instead of being spent.

Take a mortgage? Make sure your financial plan is not affected, ask yourself these 5 questions …

Can you afford a home loan?

You too, like many others, might be tempted to put those interest rates at a decade’s low on home loans and make the most of the lower home prices before things start to pick up and go. get back to normal. While these external factors seem attractive, the decision to take on more debt to buy a home also depends on certain factors about you and your finances.

For many, buying a home means stretching finances to an uncomfortable limit and stretching too thin in the process. Before you apply for a large home loan, make sure you are on a solid footing when it comes to your personal finances and goals. Ask yourself these five questions about your emergency fund, down payments, EMIs, and the status of other financial goals, to make sure your mortgage doesn’t end like a noose around your neck.


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