As home loan rates cross 9%, here are 5 ways to reduce your burden

Know Your Benchmark

The benchmark rate is an integral component of a retail loan. It is the lowest rate at which a loan is granted. Since October 2019, floating home loan rates have been linked to the repo rate, which currently stands at 6.5%. Pre-2019, loans were linked to the Marginal Cost of Funds based Lending Rate (MCLR), and to the Base Rate before that.

Loans tied to older benchmarks remained unaffected by interest rate changes, especially during high inflation with rate cut benefits not reaching the borrowers. To remedy that, RBI introduced the external benchmark in 2019. So, if your loan is still tied to an older benchmark, you are likely to be servicing an expensive loan. It is, thus, advisable to explore shifting your existing loan to a repo-linked one.

Switch To A Lower Spread

Loan spread or spread is another crucial component of repo-linked loans. For home loans, the spread is set based on your credit score, source of income, and the loan amount you’ve applied for. Home loan spreads have drastically fallen in 2024 as compared to early 2020 when they were 275 to 360bps over the repo rate. Currently, the lowest interest rates range from 8.30% to 8.50%, resulting in spreads as low as 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’re applying for a new loan, try to get a lower spread to reap the benefit of future rate cuts. If you have an existing loan, explore refinancing it to a lower spread.

Check If You’re On A Higher Rate Aand Switch

Currently, the lowest home loan rate is 8.30%. Several lenders rate are also offering rates around 8.50%. With that in mind, assess how much extra you’re paying above 8.50% for your home loan. If it is less than 50 basis points, it may be manageable under the current situation. But, if it’s over 50 bps, hovering in the 9-10% range, you should consider refinancing your loan to a lower rate.

Refinance To Reduce Your Burden

Check with your existing lender about refinancing your loan to a lower rate. This option may require less paperwork and a smaller processing fee. But if your bank does not offer this option, explore refinancing with another lender. However, that may involve comparatively more paperwork and higher costs by way of processing fees, MOD charges, and legal fees. The total cost may range from 0.5-1.00% of the loan amount you’re refinancing. However, if the rate cut is significant, the refinance will pay for itself in the form of lower interest payments.

Prepay And Lower Your Debt Burden

If your finances permit, consider pre-paying 5% of your outstanding loan once a year to lower your debt burden. You could also up your EMI amount or prepay an extra EMI at the beginning of the year to reduce your tenure. However, if the interest rate is untenable, consider fully pre-paying your outstanding loan. But before doing so, consider all aspects and the impact this move may have on your finances.

Adhil Shetty is the CEO of BankBazaar.com