Mortgage Interest Rates: Home Loan EMIs Expected To Rise As Interest Rates Hit Bottom: What Borrowers Should Do

There are indications that borrowing costs have finally bottomed out. For example, interest charges for new borrowers of SBI home loans increased by 25 basis points recently after the bank withdrew its “time-limited offer” and restored original interest rates. The new rates for SBI home loans from April 1 start at 6.95%, compared to 6.7% until March 31. It may well be that other lending entities will soon follow suit.

“Although the impact of the incentive withdrawal is only 25 basis points, it can have a system-wide impact as other financial institutions typically follow the SBI with a time lag,” Naveen said. Kukreja, CEO and co-founder of PaisaBazaar.

Another indicator is HDFC, India’s leading mortgage industry, which increases interest on its term deposits by 10 to 25 basis points after a 29-month spread. Since this move will increase the cost of funds for HDFC, its loan interest rates must follow suit. Other institutions are following HDFC and therefore any increase in HDFC lending rates will also have a system-wide impact. Borrowers should be very careful now. If not handled properly, rising interest rates will wreak havoc on your finances as it will lead to increased loan or EMI terms. So what are the options available to new and existing borrowers?

For new borrowers

To make this analysis more meaningful, let’s start with the options for new borrowers. Generally, fixed rate loans are the best option in a scenario of rising interest rates. “Since interest rates are at their lowest, now is the best time to take out fixed rate auto loans, personal loans, and so on.

New mortgage borrowers are not so lucky because only a few establishments offer fixed rate mortgage loans. Another problem is the high interest rates on fixed rate loans. “Since the interest rates charged on fixed rate home loans are very high and not at all lucrative, it is best for new mortgage borrowers to stick with variable rate options,” Kukreja explains. For example, LIC Housing Finance charges 10.05% for a fixed rate home loan of Rs 50 lakh, compared to only 6.9% for its variable rate variant. Although HDFC offers a fixed rate option with a small premium, it is not very useful as the interest is only fixed for the first two years.

Since the floating interest rate is the only viable option for new home borrowers, they need to be mentally prepared for the rate hike in the future and the resulting increase in EMIs. It makes sense to keep an extra cushion for this – it can take the form of an increased contingency fund or investments going towards non-critical goals that can be diverted when needed.

For existing borrowers

In the event of an increase in interest rates, banks usually offer the option of increasing EMIs or extending the term of loans. The option to extend the loan term, however, may not be available to all borrowers. “As banks generally do not allow the term of the loan to extend beyond the term of the original loan or the borrower’s retirement, some borrowers have no choice but to withdraw. be satisfied with increasing IMEs or keeping the same IMEs by making upfront payments, “says Aparna. Ramachandra, Founder and Director, Rectifycredit.com. Banks will offer automatic loan term extensions to borrowers who have taken out loans. loans a few years ago when rates were higher, in which case the overall loan term may have decreased due to the subsequent decline in interest rates and banks will gladly reinstate the original loan term.

Should you opt for a loan term extension if you have the option? No, say the experts. “If your monthly cash flow allows it, keep the same mandate and ask for an increase in IMEs. This will help you reduce the total amount of interest paid, ”says Shetty.

Suppose you have just started repaying a loan of Rs 50 lakh at 7% interest and paying an EMI of Rs 38,765. If the rate increases to 8% your EMI will increase to Rs 41,822, an increase of Rs 3,057 per month. If you try to keep the IME at Rs 38,765, your tenure will increase to 24 years and 8 months. This additional 56 month payment period will also dramatically increase your total amount of interest – from Rs 50.37,280 (if paid in 20 years with an EMI of Rs 41,822) to Rs 64.71,280 (paid over 24 years and 8 months with an EMI of Rs 38,765), an additional interest outflow of Rs 14 34 333.

What if your current monthly cash flow doesn’t allow for an increase in IMEs? Compare the return on all your investments and make a decision based on it. “Rather than putting money in low yielding instruments, redeem some of it and make upfront repayments. Dropping low yielding products like insurance endowment plans may be another option for raising funds, ”says Ramachandra.

Check the lower rates

Since we are entering an interest rate stream, the interest rates offered by institutions can vary widely. So, regularly compare the rates offered by other borrowers and make sure you are getting the best rates. Should you try changing if another lender’s offered rate is low, say 20 basis points? No. “Since switching loans comes with costs, only consider switching when the difference in loan rates is more than 50 basis points,” says Kukreja. Please note that in addition to external costs such as processing fees, stamp duties, etc., you must also devote extra time to completing these formalities.