Home Loan Tips: Is your home loan becoming a burden? Try these strategies

Owning a home is a dream for about 70% of people, but due to limited income and rising expenses, many turn to home loans to fulfill this dream. While home loans may seem manageable initially, they can become a financial strain over time. To prevent this, it's essential to make informed decisions when taking out a loan. Here are some tips to help ease the burden of a home loan:

Understanding the Impact of Repo Rates:

One of the key factors influencing your home loan is the repo rate set by the Reserve Bank of India (RBI). The repo rate is the rate at which the RBI lends money to commercial banks.

• When the repo rate is high, borrowing becomes more expensive for banks, leading to higher interest rates on home loans.
• Conversely, a lower repo rate makes loans more affordable. Keeping track of repo rate changes can help you plan and manage your loan effectively.

Tips for Managing Your Home Loan:

1. Floating vs. Fixed Rates:

   • Floating Rates: Most home loans in India are based on floating interest rates linked to the repo rate or other benchmarks. This means your loan interest rate can fluctuate as the repo rate changes.
   • Fixed Rates: Fixed-rate loans remain stable for a certain period but may reset according to the bank’s terms. Fixed rates offer stability, but floating rates could save you money if rates drop.

2. Loan Benchmarking:

   • Since October 2019, new home loans have been benchmarked to the repo rate. Loans approved between April 2016 and October 2019 followed the Marginal Cost of Funds Based Lending Rate (MCLR), which didn’t respond to repo rate fluctuations.
   • Understanding your loan type helps in predicting how interest rate changes will affect your repayment schedule.

3. Effect of the Spread:

   • The spread is an extra cost added to the repo rate by banks and depends on factors like your credit score, income source, and loan amount. This spread stays fixed throughout the loan term, impacting the total interest you pay over the years.
   • As of 2024, home loan spreads have dropped significantly, with the lowest rates ranging between 8.20% and 8.50%. Monitoring spreads can help you find a better deal or negotiate with your lender.

By understanding these factors and carefully selecting the type of loan and interest structure, you can avoid your home loan becoming a financial burden over time.