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How Can You Manage Your Finances with Rising Home Loan Rates?

The Reserve Bank of India (RBI) raised the repo rate twice, first by 40 basis points in May 2022 and then by 50 basis points in June 2022, ending the period of historically low housing loan interest rates. More rate hikes are expected as India’s inflation continues to surge. This means that the housing loan interest rates that have been increasing now could continue to rise further. In such a macroeconomic scenario where you have no control, you can look at your personal finances and see how to best manage the impact. An increased housing loan interest would essentially mean that your total interest outgo would increase, increasing your cost of borrowing. Note that enhancement in the home loan not just means an increase in rates of the PSUs but also the private banks like Axis Bank home loan, HDFC bank home loan, ICICI bank and others. 

Here are a few things you can do to deal with the increasing home loan interest rates:

1. Consider a balance transfer

When you opt for a home loan balance transfer, you essentially transfer your home loan from your existing lender to a new lender who is offering a lower housing loan interest rate. Depending on when you took out your loan and at what rate, there may be a possibility to currently find a lender who is offering a better home loan interest rate and terms. Here’s where before opting for this option, you must use an Axis Bank home loan EMI calculator or calculator from any other lender to understand your overall savings in your interest constituent. 

2. Look at your credit score

You should check your credit score and see if there has been a significant improvement there. If yes, you can use that to leverage a better home loan interest rate either with your existing lender or a new lender. This applies even when you have had a significant increase in your income, and your overall financial profile is a lot stronger than when you first applied for the home loan.

3. Prioritise part prepayment

Another way you can try to lower your cost of borrowing is by considering part prepayment of your home loan. If you have money invested in avenues such as fixed deposits, mutual funds, etc., you should look at using that to prepay a part of your home loan to lower the overall interest outgo. Paying off high-interest debt should always be a priority when you are financially planning.

4. Opt for a tenure extension

If you do not have the funds to partially prepay your home loan, you can consider opting for a tenure extension. This will not help reduce the interest outgo; it may, in fact, increase it. However, extending your home loan tenure will reduce your Equated Monthly Instalment (EMI) burden. A reduced EMI may make it easier for you to meet all your financial obligations while comfortably paying your EMIs.

In the current rising interest rate scenario, it’s also important that you focus on a few other aspects of financial planning. For instance, increase your emergency fund so that in case of job loss or income reduction, you don’t default on your home loan EMIs until you figure out your next step. Exiting from low-return investments to prepay your loan partially, looking into a balance transfer after a cost-benefit analysis, assessing your financial profile, and more are steps you can take right now.

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Note that there’s not just an increase in home loan rates, but also there’s an increase in the raw materials that have enhanced the property costs in India. Don’t know? Read on to know. 

The global supply chain disruptions due to geopolitical issues have led to prices of raw materials surging in several industries, including real estate. Materials such as cement and steel that are central to construction saw a price hike by over 20% annually in March 2022. The raw material costs have only continued to increase as global volatility keeps escalating. If you are wondering whether this increase in raw materials cost will increase property prices, let’s first take a look at what exactly is happening:

· Cement prices

In March 2022, cement prices rose by 11% on a year-on-year basis, reaching Rs 395 per 50 kg. Rising cement prices have a significant adverse impact on the real estate market because it’s one of the most important construction raw materials. In April, the all-India average price of cement reached a record-high month-on-month increase of 8.1% at Rs. 25-30 per kilo. Rising demand for cement, along with the rising costs of input materials such as coal and crude prices, are only further pushing cement prices up.

· Steel prices

Steel prices, too, have been increasing since earlier this year. An increase in the cost of iron ores, coking coal, and crude led major steel producers to hike prices. The price of a ton of Hot Rolled Coil (HRC) steel reached between Rs 76,000 and Rs 79,000 in April and continues to remain high. As per industry experts, this upward trend in steel prices will continue for at least another two to three months and will continue to pose problems for developers.

Impact on property prices

Since the real estate market had finally begun recovering from the COVID-19 pandemic, developers did not want to put the burden of increased raw material costs on the buyers. For the most part, until now, developers have been taking the hit of rising raw material costs. Now, however, as the prices continue to increase further, they are finding it hard to accommodate them. Already, certain major developers have increased their property prices across portfolios by 10%, while some others are considering a 5% increase. So, yes, raw material costs are surging and will most likely continue to increase property charges in the country. Given the Russia-Ukraine situation, a global energy crisis like never before is looming and how things pan out primarily depends on whether the situation deescalates or further escalates.

This is why it is important for you to undertake some financial planning before you apply for a home loan now. To get started, you should use a home loan EMI calculator to get an estimate of what your Equated Monthly Instalment (EMI) will be. This will give you an idea of what your homebuying budget should look like and how you can plan your finances around it accordingly. Applying for a home loan is a long-term financial commitment as the loan tenures tend to run into decades. Thus, having a solid repayment plan in place before you apply for a loan is crucial, especially given the current macroeconomic scenario.

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