A home loan makes the process of acquiring a home easier and faster, helping you get rid of long years of saving. It has, however, a set of risks associated, and if they aren’t managed properly, it can result in a situation which can be financially stressful for you.
The amount of loan is generally so huge that even if you are willing to pay off, you may end up failing to find a way to do so. The unparalleled rise in the interest rates of home loans in the span of the last ten months has made the lesser-exposed risks more aggravated. This provides an opportunity for the new home loan borrowers to get a clear understanding of the associated risks. It also offers the present borrowers to take up corrective measures in order to face such challenges.
Here are five key takeaways which the borrowers should gain before taking a home loan:
1. Scattered Interest Cycles are Common (Especially with Long-term Loans)
It is not common to take a housing loan and repay it within a span of the next 1 or 2 years. These amounts are big and so are the tenures. Hence, it is imperative to embrace the ideology of long-term debt. Interest rates increase and decrease in cycles. This implies that there is a high likelihood that you will witness lots of increments and decrements in the interest rates during a particular loan tenure.
The global economies are not stagnant and they fluctuate with time. This must be taken into account by the new borrowers and they must be ready to experience a number of fluctuations in the interest rates as well. The ups and downs in their reversals during their loan tenure must be considered as well.
Rates of interest are cyclical in nature. This is so because they increase and decrease quite a lot with time. The tenures offered with home loans are one of the longest ones. This increases the probability of making the borrowers prone to the experience of several economic cycles.
2. Never Time the Decisions of your Loans
Whether it is a high rate of interest or a low one, nothing lasts forever! After every 20 years, one or two high interest rate cycles will definitely arrive. It is not possible for an individual to predict the timeline for the lower interest rate.
The new housing loan borrowers shouldn’t time their applications depending on the regimes of the interest rates. You must make your decisions based on your needs and not on the situation of the interest rates.
3. Leave a Scope to Absorb the Shocks of the Rate-hikes
Most individuals tend to stretch their financial budget when purchasing a home to enhance it. However, this stretching must be done after taking into consideration the interest rates which prevail at the time. However, a lot of people fail to think of a situation when the interest rates will hike. Hence, it is advisable to not overextend yourself to an extent wherein you fail to face the challenges that may come your way in the form of high interest rates.
Hence, it is better if you keep some legroom in the budget of your household so that you can deal with the challenges even if the EMI hikes by 20-25%. Let’s take an example. Suppose, with the current interest rate, you can afford an EMI of ₹50,000. It is better to opt for a housing loan wherein you are required to pay an EMI of ₹40,000. This allows you to keep a buffer of ₹10,000 and you can fulfil the requirements even if the interest rates rise in the future.
4. Avoid Tenure Extension
The interest amount to be paid on a home loan increases with increasing loan tenure. There may be cases wherein your home loan permits you to extend your loan tenure instead of increasing your EMI. In such a scenario, it is better to choose the higher EMI in case the rate hikes. If you don’t do that, the cumulative interest outgo will be way beyond your expectation and could get challenging for you.
5. Utilise your Improved Credit Score to the Fullest
You may have taken a housing loan at a higher rate of interest due to certain compulsions. Additionally, the increasing interest rates would have been making your matters more difficult. In such a scenario, you can opt for facilities to transfer your loan balance amount to a lender which offers lower interest rates and better facilities. However, you must evaluate the additional charges or the processing fees, if any, prior to the home loan balance transfer.
Suppose your initial rate of interest was more due to your below average credit history. However, you have had a disciplined history of your repayments. This implies that your credit scores would have improved. This will help you in case of a home loan balance transfer.
The existing borrowers who have had significant improvisations on their credit history in the recent past could explore this facility of home loan balance transfer. Their improved credit history could make it easier for them to get home loans from other lending institutions at a lower interest rate.
Demand for the housing loans has been rising over the past two to three years now. With so many government schemes and other methods, it has become relatively easier for people to opt for home loans. Several banks and NBFCs offer home loans at competitive and low interest rates. You can choose the one that best fits your requirements.
ICICI Home Loan is one of the best options that you can choose to take a step towards your home ownership dream. However, buying a home requires a lot of financial planning and budgeting. You can get an estimate of your EMI based on the interest rates and loan amount through the ICICI home loan calculator on their website.
This will help you understand your requirements better and help you deal with your finances with ease. Don’t let the rising interest rates worry you. Keep in mind the pointers that we have discussed above and make your home buying journey seamless.