How to financially prepare for a future rise in interest rates on home loans

The chances of a further reduction in rates are very low. However, home borrowers should not ignore the possibility of rates rising from current levels. Since rate transmission is now smooth, any rate increase by RBI will be immediately reflected in their home loan rate. Any increase in home loan rates will increase the EMI (or loan term) and could mess up your financial planning.

For example, the EMI for a 20-year home loan of Rs 1 crore will be Rs 75,739 @ 6.7%. The same will go up to Rs 81,787 @ 7.7% and drop to Rs 88,052 @ 8.7%. The best thing to do in situations like this is to opt for fixed rate loans. However, the options are very limited and only a few options offer fixed rates for a limited period. More importantly, these partially fixed rate home loans also charge higher interest rates.

Partially fixed loans will cost you more

Consider the additional costs before opting for partial fixed loans.

While these rate increases are out of your hands, you can prepare for them by assuming a higher interest rate. “Instead of today’s very low rates, assume a reasonable mortgage rate of around 8.5% and systematically invest the remaining EMI elsewhere,” says Aparna Ramachandra, founder and director of Rectifycredit.com. For example, the EMI for a 20-year home loan of Rs 1 crore is Rs 86,782 at 8.5% and will be Rs 75,739 at 6.7%. You should invest the difference of Rs 11,043 in a short-term debt fund every month. This corpus will serve as a backup if prices increase. You will be in a better position even if the rate does not increase, because this money will be invested in savings instead of being spent.

Take a home loan? Make sure your financial plan isn’t impacted, ask yourself these 5 questions…

Can you afford to take out a home loan?

Like many others, you might also be tempted to accept those home loan interest rates that have been the lowest in a decade and make the most of falling house prices before the things do start to straighten out and get back to normal. While these external factors seem attractive, the decision to take on more debt to buy a home also depends on certain factors about you and your finances.

For many, buying a home means stretching finances to an uncomfortable limit and stretching themselves too thin in the process. Before you apply for a big home loan, make sure you’re on solid ground when it comes to your personal finances and goals. Ask yourself these five questions about your emergency fund, down payments, EMIs, and the status of other financial goals, to make sure your home loan doesn’t turn into a noose around your neck.

Bernadine J. Perkins