Global economic volatility and uncertainty as well as surging inflation have prompted the RBI to make another policy rate hike by 25 bps, taking the repo rate to 6.5%. When the repo rate is increased by the central bank, the cost of borrowing for banks also goes up. As a result, they may pass on the higher cost to their customers in the form of higher interest rates on home loans and other types of loans.
This means that home loan borrowers may have to pay a higher rate of interest on their loans, which can increase their monthly repayments. The higher repayments can put a strain on their finances, particularly if they have limited income or multiple loans.
Adhil Shetty, Chief Executive Officer (CEO) and Co-founder of Bankbazaar.com, and Co-Chair of the FICCI Fintech Committee, says, “The silver lining is that the inflation is likely to moderate in 2024-25 and the RBI seeks to bring down the inflation to its target levels – within 4%. The smaller rate hike today can also be attributed to softening of retail inflation and the US Federal Reserve moderating the pace of increase in its benchmark interest rate. In December, the apex bank raised the key benchmark interest rate (repo) by 35 basis points (bps) after delivering three back-to-back increases of 50 bps. The recent hike will burden the existing borrowers, and new borrowers will have to borrow at higher interest rates. It will make retail loans such as home, auto, and personal loans, among others, costlier, and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both.”
It’s important to note that changes in the repo rate may not have an immediate effect on the existing home loan borrowers, as their interest rates may be fixed for a certain period. However, the higher repo rate can impact new home loan borrowers, as well as those who have taken a floating rate loan.
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What can borrowers do in this situation?
Switch to a fixed rate loan: If a borrower has a floating rate loan, they can consider switching to a fixed rate loan. This will protect them from the impact of any further increase in interest rates.
Negotiate with the bank: Borrowers can also try to negotiate with their bank for a lower interest rate, especially if they have a good credit history and have consistently made timely repayments.
Consider debt consolidation: If a borrower has multiple loans, they can consider consolidating their debts into a single loan. This can reduce the number of repayments and simplify their finances.
Review their budget: Borrowers can also review their budget and try to reduce their expenses to ensure that they are able to make the higher repayments.
Seek financial advice: If they are facing financial difficulties, they can seek the advice of a financial advisor, who can help them manage their debt and make a repayment plan.
How to Plan Your Repayment Strategy?
1. Increase EMI once a year by 5%. This will pull your tenor back by a few months. Next year, take stock and repeat the dose, if required. Make this an annual exercise.
2. A 20-year loan can be repaid in 12 years if you pre-pay 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 most, it makes sense to repay it slowly while balancing it with investing needs. The markets have returned 12% over the long term and the cost of a home loan with tax deductions may be 5-7% a year.
3. Above all, what matters is the timeframe in which you intend to repay the loan. For example, your intention was to repay a 20-year loan in 10 years but the rate hikes have taken your tenor to 25 years. In this case, ensure that for the next 10 years, you pay back at least 10% of the loan through a combination of EMIs and pre-payments. This will keep you on track for your goal.
It’s important to remember that the impact of a repo rate hike on a home loan borrower can vary depending on their specific financial situation. Borrowers should assess their options carefully and make a decision that is best for their financial well-being.