In its latest monetary policy review, the Reserve Bank of India (RBI) maintained the repo rate at 6.5% for the eighth consecutive time on Friday, amidst a backdrop of declining inflation and robust GDP growth. The apex bank’s decision is aimed at stabilising inflation within the target range of 2-6%. However, it has some implications for home loan borrowers, both existing and new. With borrowing costs remaining high, it is crucial for borrowers to adopt new strategies to manage their home loans more efficiently.

Adhil Shetty, CEO of Bankbazaar.com, said, “For the eighth consecutive time, RBI has kept the repo rate unchanged at 6.5% in its bi-monthly interest rate decision, amid robust growth momentum. Retail inflation hit an 11-month low in April 2024 at 4.83%, remaining within the RBI’s tolerance band of 2-6%.”

“Since the repo rate directly influences lending rates, an unchanged rate means existing loans remaining benchmarked to an elevated repo rate at 6.50 with the possibility of new loans being offered with lower spreads than older loans. Any rate cut in future would lead to lower rates, hence lowering the EMIs that loan borrowers have to pay. However, the fixed interest loan will not get impacted because of this,” added Shetty.

Borrowers have several options to decrease their cost and make use of these tips to ensure the high interest rate does not hamper their financial aspirations and goals. Here are tips to help you manage your debts well.

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Impact on Home Loan Borrowers

Existing Borrowers

For the existing home loan borrowers on floating interest rates, the RBI’s decision would mean continuation of high EMIs. Higher interest rates translate to increased monthly payments, straining household budgets. Therefore, borrowers who choose to keep their EMIs unchanged may face an extended loan tenure, leading to higher overall interest payments over the life of the loan. It is good to check with your lender and plan the best strategy based on your specific requirements.

New Borrowers

New borrowers entering the market will also face the brunt of high interest rates, resulting in higher initial EMIs. This scenario might affect their loan eligibility, as banks assess repayment capacity against the backdrop of elevated interest rates. Hence, some potential homebuyers may delay their purchase decisions.

What Should You Do?

* Refinance

You may consider refinancing your home loans only if there are significant savings, despite the high costs associated with switching lenders. Refinancing should include a careful calculation of processing fees and other related expenses to ensure it is financially beneficial for you.

* Negotiate with Your Current Lender

It is good idea to approach your current lender to negotiate a better rate can be a worthwhile strategy. Lenders may offer competitive rates to retain valuable customers. If successful, this negotiation can reduce your interest burden without the need for refinancing.

* Make Part-Prepayments

Making part-prepayments towards the principal amount of the loan can be a strategic move. By reducing the principal, borrowers can lower the interest component of their EMIs. Even small, regular prepayments can significantly reduce the total interest paid over the loan tenure.

* Consider Fixed Rates

If you are anticipating more increase in rates, switching to a fixed-rate home loan can provide stability in EMIs. Fixed rates will ensure that your EMI remains constant throughout the loan tenure, offering peace of mind against future rate fluctuations.

Tips for New Borrowers

Shop Around for Best Rates

If you are a new borrower, you must actively compare loan offers from different lenders. Even marginal differences in interest rates can lead to substantial savings over the loan period. Using online comparison tools and consulting financial advisors can aid in securing the best deal.

Assess Fixed vs. Floating Rates

It is a good idea to assess the benefits of fixed-rate versus floating-rate home loans. A fixed-rate loan offers stability and predictability, while a floating-rate loan might be advantageous if borrowers expect the rates to decline in the near future.

Optimise Loan Tenure

Choosing the right loan tenure is crucial. A shorter tenure results in higher EMIs but significantly reduces the total interest paid. Conversely, a longer tenure lowers the EMI burden but increases the total interest outgo. Borrowers should balance these factors based on their financial capabilities.

Maintain a Healthy Credit Profile

A good credit score can unlock better interest rates. Shetty said, “New borrowers should focus on maintaining a healthy credit profile by managing existing debts responsibly and avoiding defaults. Lenders offer favourable rates to borrowers with higher credit scores.”

If possible, making a higher down payment reduces the loan amount, thereby lowering the interest burden. This also improves loan eligibility and terms offered by lenders.

Financial Planning for All Borrowers

Keeping an emergency fund is essential to cover EMI payments during financial hardships, preventing defaults. Regularly reviewing and adjusting personal budgets to accommodate EMI payments ensures financial stability. Staying informed about RBI’s future rate changes can help borrowers make timely and wise decisions about their home loans.

Home loan borrowers must take proactive steps to manage their loans within their repayment capacity. Whether refinancing or other strategy, borrowers can reduce the financial impact of the unchanged repo rate.