RBI monetary policy: With the rise in repo rate, home loan EMIs will also increase. Read on to see what are the options you can choose to control the hike
Home loan borrowers will have to shell out more in their equated monthly installments (EMIs) now as Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Wednesday again raised the repo rate — the key interest rate at which the RBI lends money to banks. In this high interest rate regime, it is natural for borrowers to get worried. At this point, experts are suggesting that existing borrowers explore different possibilities to reduce their interest burden.
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Generally, when RBI hikes the repo rate, it increases the cost of funds for banks. Banks will have to pay more for the money they borrow from RBI. Consequently, banks pass on the cost to borrowers by increasing their loan interest rates, making EMIs costlier.
V Swaminathan, executive chairman at Andromeda Sales and Apnapaisa.com said that the recent rate hike of 25 bps will make EMIs expensive by approximately 2-4 percent.
Atul Monga, Founder and CEO at Basic Home Loan illustrated this with an example.
"If an individual has borrowed a home loan of Rs 30 lakh at 8.50 percent per annum for a tenure of 20 years and the interest is hiked to 8.75 percent, his/her EMI will go up approximately by Rs 476 from Rs 26,035 to Rs 26511," Monga said.
This means that homebuyers will now have to rework their strategies to lessen the burden of higher interest outgo on their loans. As far as loan tenure increase is concerned, that may reduce the monthly installment, but overall interest payments will be higher.
So, this may not be very advisable, experts say.
Let's look at other options to consider:
Choose a floating interest rate
A floating interest rate varies with the market scenario. The interest will be calculated on a base rate with a floating element being added so that when the base rate changes, the floating rate also changes.
As they are tied to market conditions, the EMI will decrease with the rate decrease.
EMI increase option
Existing home loan borrowers should opt for the EMI increase option, with the consent of their lenders, as and when their interest rates are increased. Opting for the EMI increase option would result in lower interest costs than the tenure increase option, experts say.
Borrowers can also increase the EMI amount by 5 percent every year to reduce the interest repayment burden. They can align this increase with the increase in salary or on receiving any other annual bonus.
Additionally, they can pay one more EMI (than the usual number of EMIs) every year. On combining the two, i.e. paying one additional EMI every year, along with increasing the EMI amount by 5 percent every year; the interest burden will reduce significantly.
Experts concur that in an ascending interest rate environment, it is always better to prepay home loans or housing loans as it is a great way to close the debt faster, save money on interest outgo, and reduce EMIs. However, this should be based on a cost-benefit analysis.
If the prepayment isn’t going to save a lot of interest, such as when borrowers make the pre-payment later in the tenor of the loan, then they may want to consider the opportunity cost of making a pre-payment vs. putting the funds in an investment that provides higher returns than the savings from pre-paying the loan.
Make a higher down payment
By paying a larger amount upfront, the loan amount will lessen and hence the EMI will be lower.
Negotiate with the lender
Borrowers can also try negotiating the interest rate with the lender to get a lower EMI.
Transfer the loan to another lender and choose the overdraft option
If borrowers have high-interest rate loans, they can transfer the balance to another lender offering a lower rate and lower their EMIs and then opt for the home loan saver/overdraft option.
Under the overdraft option, a savings or current account is opened for the home loan borrower to deposit his/her surpluses and is linked to the home loan account. The interest cost of the home loan is calculated after deducting the balance maintained in the savings/current account from the outstanding loan amount. This can lower the interest cost for the borrower. He/she is free to withdraw from the savings/current account as and when any fund requirement arises.
(Edited by : C H Unnikrishnan)
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