After the Reserve Bank of India's two consecutive interest rate hikes, increase in the rate at which banks lend is bound to increase. Experts expect another 25 basis points rise in repo rate in RBI's next monetary policy meet.
Major banks like SBI (State Bank of India) and ICICI Bank have already increased the interest rate on their home loans. The MCLR for SBI has been increased by 20 basis points from 8.25 to 8.45 percent. ICICI Bank, on the other hand, has hiked both its six-month and one-year MCLR by 15 basis points.
If you are an existing home loan borrower at floating interest rate and looking to reduce or manage your burden of EMIs you can explore the various options to do it.
The decision to make a partial payment of the loan will leave you with two options: To reduce EMIs or bring down home loan tenure. The option you chose will depend on your disposable income meaning how much can you prepay without it leaving you financially vulnerable.
If you make a lumpsum amount payment to an extent of the home loan and choose to reduce your home loan tenure for say 5 years, you will save on interest for the period of 5 years which will be huge load lifted off you.
On the other hand, if you choose to keep the tenure same and reduce the extent of EMI, it will reduce your monthly burden, which will compensate for the disposable income that you spent on prepayment. It will however not reduce the interest burden to a great extent due to the possibility of a future interest rate hikes.
Home loan balance transfer
If you do not have any lumpsum disposable income at hand. Opt for a home loan balance transfer to a bank that lends at a cheaper rate. This way your EMIs will be reduced and you will not have to drain your savings or break your investments for it.
Consider investments with high return rates
While it is not practical to break investments made for certain financial goals, you can, however, consider high yielding asset classes that will help you in making partial prepayments towards the home loan.
Either you can strategically put your money in instruments that will beat the interest rates that you are meant to pay on your loan to reduce the blow from the increased rates, or invest the money you were going to make a prepayment with to fund your EMIs.
Further, it is important to not break your emergency fund for home loan payments. It could leave you vulnerable to any future unexpected events.