So what should a home borrower do? Should you go for an EMI increase, tenor increase or look to prepay your loan? Experts are of the opinion that what matters is the timing in which you intend to repay the loan. The silver lining is that the RBI should break its rate-hiking cycle in the coming months, as inflation is moderating. Therefore, today’s increase in the repo rate is likely to be the last blow to your loan for some time.
Impact of RBI hike in repo rates:
According to Adhil Shetty, CEO of BankBazaar, the increase in repo rate will burden existing borrowers and new borrowers will have to borrow at higher interest rates. It will make retail loans like home, auto, personal and other loans more expensive, and borrowers will need to be ready for higher monthly EMIs or term extensions, or both.
He explains, “as the repo rate rises, it becomes more expensive for banks to borrow from the central bank, and as a result, they often pass the increased cost onto their customers in the form of higher interest rates on loans. It means that loan borrowers may have to pay more in interest, which can increase their monthly repayments.” “This can affect their financial situation, especially if they have multiple loans or limited income,” she adds.
What should a borrower do?
Adhil Shetty recommends three important things to note when dealing with repo rate increases:
- Increase EMI once a year by 5%. This will set your tenor back a few months. Next year, take stock and repeat the dose as needed. Make this an annual exercise.
- A 20-year loan can be repaid in 12 years if you prepay 5% of the loan balance once a year. You could go faster or slower depending on your situation. A home loan is a low-cost loan, so for the most part it makes sense to pay it back slowly while balancing it against your investment needs. The markets have returned 12% over the long term and the cost of a tax deducted home loan can be 5-7% a year.
- Above all, what matters is the timing in which you intend to repay the loan. For example, if your intention was to repay a 20-year loan over 10 years but rate hikes have pushed your tenor to 25 years. “If that’s the case, make sure you pay off at least 10% of the loan over the next 10 years through a combination of EMI and prepayments. This will keep you on track to meet your goal,” he says.
Atul Monga, co-founder and CEO of BASIC Home Loan, says borrowers can handle higher EMI in a number of ways. “Since May 2022, the RBI has raised repo rates by a total of 250 basis points. However, you can effectively mitigate the impact of the hikes by following a few simple steps. First, opt for a floating interest rate. Unlike the fixed interest rate, it goes up and down with the rest of the market,” he says.
“Next, try to prepay your loan, especially earlier on the tenor loan, when the interest component also remains high. Even if the interest rates are higher and you pay more than your EMI, you will reduce the principal amount and your overall interest will go down. Also, try to stay disciplined with your savings, maintain good credit, and do your research on lenders that offer better interest rates,” Monga tells TOI.
