Some major banks like HDFC and Bank of India have also increased loan rates recently. With home loan rates hovering above 9%, here are some strategies borrowers can adopt to get some relief.
The Monetary Policy Committee (MPC) of the Reserve Bank of India has kept the rates unchanged for the seventh consecutive time after its latest meeting, which was the first for 2024-25. The decision to keep the rates stable has been taken after careful consideration of the inflation outlook and several macroeconomic indicators.
Repo rate is the interest rate at which RBI gives loans to other banks. Currently the repo rate is 6.5 percent. The central bank is continuously waiting as global factors are influencing crude oil prices, which are seeing a rise. Although a rate cut is expected this year, currently prevailing macroeconomic factors rule out this possibility for now.
This means that home loan borrowers will have to wait longer to find some relief from higher rates and consequent higher loan EMIs. Some major banks like HDFC and Bank of India have also increased loan rates recently. With home loan rates hovering above 9%, here are some strategies borrowers can adopt to get some relief.
Know your benchmark
The benchmark rate is an integral part of the retail rate. This is the lowest rate at which the loan is given. From October 2019, floating home loan rates have been linked to the repo rate, which is currently 6.5 per cent. Before 2019, the loan was linked to the Marginal Cost of Funds based Lending Rate (MCLR) and before that to the Base Rate.
Loans tied to the old benchmark remained unaffected by interest rate changes, especially during periods of high inflation when the benefits of rate cuts were not reaching borrowers. To solve this, RBI introduced external benchmark in 2019. Therefore, if your loan is still tied to the old benchmark, you will be paying an expensive loan. Therefore, it is advisable that you consider transferring your existing loan to a repo-linked loan.
Switch to lower spreads
Loan spread or spread is another important component of repo-linked loans. For home loans, the spread is determined based on your credit score, source of income and the loan amount you have applied for. Home loan spreads have declined significantly in 2024 compared to the beginning of 2020, when they were 275 to 360 bps above the repo rate. The lowest interest rates currently range from 8.30% to 8.50%,
resulting in a difference of 180 to 200 basis points. Once you sign your home loan contract, your spread remains the same throughout the tenure of the loan. If you are applying for a new loan, try to get a lower spread to take advantage of future rate cuts. If you have an existing loan, try refinancing it at a lower spread.
Check if you’re on a higher rate and switch
At present the lowest home loan rate is 8.30 percent. Many lenders are also offering rates around 8.50%. Keeping this in mind, assess how much extra you are paying for your home loan above 8.50%. If it is less than 50 basis points, it can be managed in the current situation. But, if it is more than 50 bps, which is in the range of 9-10%, you should consider refinancing your loan at a lower rate.
Refinance to reduce your burden
Check with your existing lender about refinancing your loan at a lower rate. This option may require less paperwork and lower processing fees. But if your bank doesn’t offer this option, explore refinancing with another lender.
However, it may involve comparatively more paperwork and higher costs in the form of processing fees, MOD charges and legal fees. The total cost can range from 0.5-1.00% of the loan amount you are refinancing. However, if the rate reduction is significant, refinancing will pay off in the form of lower interest payments.
Pay early and reduce your debt burden
If your financial condition allows, consider pre-paying 5% of your loan balance to reduce your debt burden. You can increase your EMI amount or reduce your tenure by pre-paying an additional EMI at the beginning of the year. However, if the interest rate is high, consider prepaying your remaining loan in full. But before doing so, keep in mind your financial situation and the impact of this move.
