How to reduce impact of rising home loan rates now

The repo rate increase by the Reserve Bank of India has come after four and a half years. During this period, many assumed the declining interest rate regime would continue forever. However, the signs of changing times were always there. Central banks across the world had started to reverse their easing monetary policy and bond markets in India had already priced in a 50 basis points hike in policy rates. Even before the RBI’s Monetary Policy Committee unanimously agreed on a rate hike, on Wednesday, banks and Non-Banking Finance Companies (NBFCs) had been raising their lending and deposit rates.

With the reversal of the interest rate regime being clear, existing home loan borrowers should prepare themselves for rising Equated Monthly Instalments (EMIs). However, as home loan interests vary widely across banks and NBFCs, existing home loan borrowers can reduce the impact of rising interest rate regime by transferring their home loans for lower interest rates. If you have an existing home loan, consider these factors to decide whether to transfer your home loan.

Savings on interest payouts: Reducing the interest cost is the prime reason for transferring home loans. As your application for your home loan balance transfer (HLBT) will be treated as a fresh loan application, your new lender will charge various charges and fees, such as processing fee, administrative charges, etc, while approving your HLBT application. Factor in such charges and deduct them from your savings on interest cost to see whether the amount saved is substantial. If not, then continue with your existing lender.

Renegotiation of loan terms and condition: As you apply for a home loan transfer, the new lender will impose its own set of terms and conditions before approving your application. Use this as an opportunity, if required, to re-set your loan tenure or avail a larger loan amount for carrying out repairs or additions to your home loan property.

Switching to MCLR: Those availing home loans from Housing Finance Companies (HFCs) can use HLBT to transfer their loans to banks for availing the benefits of Marginal Cost of Funds based Lending Rate (MCLR) based rate regime. Compared to the Prime Lending Rate rate-regime followed by the HFCs, MCLR system is offers better transmission of policy rates. Additionally, the concept of pre-set loan reset dates in the MCLR system would ensure that your interest rate would remain the same till the next reset date of your loan, irrespective of any changes in the bank’s lending rates during the interim period. 
This would reduce your interest cost in a rising interest rate regime, especially if you opt for longer reset period.

Availing top-up loans: Many banks and NBFCs offer top-up loans on transferring an existing home loan to them. The top-up loan would be over and above the outstanding loan amount of the transferred loan. These can be used for any purpose, such as for home renovation, medical expenses or even for buying a car.

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As the interest rate of such loans are usually lower than that of personal loans and almost all secured loan types, they can be a good instrument for consolidating your existing debt.
Thus, transfer your existing home loan to another lender if your current lender is refusing to approve a top-up loan.

By Naveen Kukreja DNA

(The writer is CEO & co-founder, Paisabazaar.com)