Last Updated on April 20, 2023 by Tabraiz
A rise in interest rates for housing loans has been observed in the past few years. Before applying, it is necessary to learn about what getting a loan entails and to plan out strategies to counter the increase in loan interest rates.
In this article, we discuss three strategies to deal with a rise in home loan interest rates.
Prepay Some Part Of The Home Loan
Prepayment refers to paying a certain part of the loan amount taken, when the borrower has funds available. It helps lessen the overall loan amount, reduces the number of EMIs and brings down the interest on the loan. Many financial institutions allow borrowers to prepay the loan without any charges. You can prepay the entire loan once and eliminate future EMIs.
If you don’t have sufficient funds to prepay the whole loan at once, you can pay a part of the housing loan.
The housing loan interest rate is applied with every EMI. You might receive bonuses, investment returns, or profits over time. Utilise the money to prepay your housing loan and deal with rising interest rates.
Let us see with the help of an example:
Assume the interest rate for a housing loan is 8.50%. The interest charge for every EMI will be 8.50% of the home loan balance.
The principal loan amount will decrease when you prepay a part of the housing loan. The interest rate will be applied to a lesser principal amount for the next EMI. You will end up paying lower interest charges throughout the home loan tenure.
Even a small prepayment amount can significantly affect the overall interest charges.
Choose a Fixed Interest
There are two housing loan interest rates: floating and fixed rates. The borrower can choose the preferred interest type for a housing loan.
A floating interest changes throughout the home loan tenure. It depends on the market rates and changes after a certain period. A floating interest rate will go up when the market rates are up.
On the other hand, a fixed interest rate is the same throughout the home loan tenure for a borrower. Since home loan rates are rising, floating interest might be a risk.
Home loan interest rates have shown an upward trend in the past few years. A fixed rate of interest is the right choice for the same rationale. Even if the market rates increase in the future, you will only have to bear the fixed interest rate, making it the most ideal and safe choice.
Manage Your Savings
Home Loan is a significant amount you have to repay. This calls for better finance management.
You must save funds to pay loan EMIs timely. You can also invest in high-return financial instruments to earn profit and pay EMIs using it.
When you check home loan eligibility, check, calculate, and create a repayment plan for yourself beforehand based on your earnings. Avail a loan amount based on what you think you can pay back.
Home loan EMIs should be pocket-friendly. The borrower must have sufficient savings even if interest rates increase slightly.
The home loan EMI amount should never exceed the total earnings.
Home Loan interest rates can rise due to market conditions. Loan prepayment can be very helpful in dealing with fluctuating interest rates.