Higher home loan EMIs after RBI repo rate hike; how you can cut total interest payout

Higher home loan EMIs after RBI repo rate hike; how you can cut total interest payout

Time to pre-pay your loans? With the Reserve Bank of India (RBI) raising the repo rate by another 35 basis points to 6.25%, your loan repayment math will change as well. This is the fifth rate hike by RBI this financial year, and is expected to translate into higher loan interest rates for borrowers. The good news, however, is that the rates may be close to peaking as experts see the RBI putting a stop to repo rate hikes in the coming months.

According to Vivek Iyer, Partner and Leader, Financial Services Risk, Grant Thornton Bharat, loan EMIs will rise further in the near future. “With the rise in interest rates continuously over the past 5 monetary policies, the deposit rates will see an uptick and to keep the Net Interest Margin balanced, the rate hikes will be passed to the borrowers which will result in an increase in the EMIs,” Iyer tells TOI.

So what should a borrower do? Experts believe that pre-paying your loan or hiking the EMIs further are possible solutions to the increasing interest burden.

How the repo rate hike impacts your loan EMIs and tenor

Atul Monga, CEO and co-founder of BASIC Home Loan explains that since a major chunk of home loan EMI goes towards meeting the interest component, with the hike, the EMI burden is expected to increase significantly.

Adhil Shetty, CEO of BankBazaar.com notes that all consumer loans have got costlier this year. Borrowers are under pressure of rising EMIs and mounting interest.

We take a look at how an increase in home loan interest rate from 6.5% to 8.75% on account of the 225 basis repo rate hike so far impacts your home loan payout: home loan.

What should borrowers do?

Monga of BASIC Home Loan recommends revising the repayment plan to manage the increased EMI burden. This can be done by opting for a longer tenure loan to reduce the EMI burden, he says. “In such scenarios, the borrower would pay a higher total interest amount, but his EMIs would remain the same. It would help the borrower with their cash flow monthly,” Monga tells TOI.

Adhil Shetty of BankBazaar.com says that since inflation is moderating, the rates are somewhere close to their peak. He advises prepaying home loans based on availability of funds since this can shorten the ballooning loan tenor.

Borrowers can pay 5% of the loan balance every year, which will help them pay off a 20 year loan in just 12 years. “Similarly, if you prepay one additional EMI every year, the loan can be closed in 17 years. If you increase the EMI by 5% every year, the loan can be finished in less than 13 years,” Shetty says.

Yet another scenario is that if your EMI increases by 10 % every year, then the loan can be close  in 10 years,” he  adds.

Lastly, he advises that borrowers should consider refinancing their home loan if the rate is not in sync with the market or their credit profile. A difference of 50 basis points warrants a look, he says.