The Reserve Bank of India (RB), in its monetary policy review meeting today, hiked the repo rate for the fifth time in a row. The revised repo rate now stands at 6.25%. Apart from making car loans, personal loans and other loans more costly, the hike now makes home loans more expensive for both new and existing borrowers.
In the last one year, the interest rates have increased by 190 basis points and another 35 basis point hike takes the total hike to 2.25 basis points. So, if you have borrowed a home loan at 6.75 per cent a few months back, then the same loan will now be available at 9 per cent. It is a huge jump within a year time as the apex bank is aggressively engaged in the last few months to tame the rising inflation in the country.
The latest repo rate hike will lead to higher equated monthly instalments (EMIs) as banks will now pass the increased lending rates on to customers. It means homebuyers will now have to rework their strategies to either prepay their loan fully or partially to lessen the burden of higher interest outgo on their loans, considering a hike of 2.25 basis points. Since tenures have already gone up for most borrowers, the only option now will be to increase the EMIs. If you choose the longer tenure, then the interest will be much higher. Here are what homebuyers can do to lessen their EMI burden!
Experts are now backing the idea of repayment to mitigate the hike in overall interest. If you have the surplus or have got funds to repay some amount, it can reduce the burden of increased EMIs. If arranging additional funds for repayment is challenging, borrowers can opt to increase their EMIs by a certain percentage every year to handle the increase interest payments. Here are tips to help you handle the rising interest rates of home loans.
PREPAYMENT OF YOUR LOAN
The best way to reduce your interest burden is to prepay your loan through annual bonus or other source of income.
Adhil Shetty, CEO, Bankbazaar.com, says, “It is advisable prepaying your home loan as and when funds are available. It can do wonders and shorten your ballooning loan tenor. For example, if you pay 5% of the loan balance every year, you can pay off your 20-year loan in 12 years. Prepaying one additional EMI every year can close your loan in just 17 years, and if you increase your EMI by 5% every year, you can finish your loan in less than 13 years. A 10 per cent increase in your EMI every year can close your loan in about ten years. Lastly, you could also consider refinancing your home loan if your rate is not in sync with the market or your credit profile. A difference of 50 basis points warrants a look.”
Refinance With Your Own Lender
You can request your lender for a lower rate. There may be a processing fee in a few thousand rupees, but it is quick and without much paperwork.
Refinance With Another Lender
If you are getting a good deal, then you can go for a balance transfer with another lender. You may be charged a processing & legal fee, MOD charges.
Opt To Pay A Higher EMI
It is advisable to opt for voluntarily paying a higher EMI. This will help you pay off your loan faster. However, you will have to manage higher monthly EMIs.
Pay One Extra EMI Once A Year
Paying one additional EMI at the start of every year can reduce your interest significantly. It helps your loan get paid off faster.
Pay 5% Of Loan Balance Yearly
Pre-pay 5% of the loan balance once every 12 months. Cost: Simple interest. Pros: Loan gets paid off faster.
Pre-Close If The Rate Is Too High
Lastly you can fully pre-pay the loan. It ensures protection from financial stress. However, you may not be able to claim tax benefits and might result in loss of savings.