There is no immediate respite for the borrowers from rising interest rates as the Reserve Bank of India (RBI) in its monetary policy meeting held on September 30.
decided to increase the repo rate again by 0.5% to 5.9%. This is the fourth repo rate hike within 5 months in a series of hikes which started on May 4 this borrowers, who have taken loans on floating rate basis such as home loans, will see their EMIs go up further. Most of the new borrowers, whether servicing fixed or floating rate loans, will need to pay higher EMIs for their loans as and when the banks pass on the latest policy rate hike.
Impact on borrowers
Till last monetary policy meeting on August 5 the RBI had already raised the repo rate by 140 bps from 4% to 5.4% within a short period of 93 days. After the recent hike.
the repo rate has been increased by a total of 1.9% (50bps +140 bps) since May this year. Most of the lenders have already passed on higher rate to borrowers especially the ones who have EBR linked home loans. However, for other borrowers, who have loans linked to older rate regime such as MCLR, base rate or BPLR, they will gradually raise the interest rate in near latest hike in repo rates will make funding costlier for existing and new borrowers. For existing borrowers, all home, car, personal, and education loans on floating rates will become more expensive. New borrowers will have to take loans at a higher price compared to last week.How much your EMI will increase.
Due to these rate hikes by the RBI, banks, NBFCs and housing finance companies have been raising their lending rates correspondingly,
which in turn means that your EMI has gone up accordingly and with the recent repo rate hike, it will rise further. Let us understand the impact of the latest 50 bps interest rate hike on different kind of you have a home loan with Rs 30 lakh outstanding with a balance tenure of 20 years at 8.5% per annum interest, your EMI will go up by Rs 957 from Rs 26,035 to Rs 26,992. For each lakh rupee of loan, you may have to dole out Rs 31.90 extra for EMI for similar tenure and interest rate hike.
Similarly for an auto loan of Rs 8 lakh for a tenure of 7 years, if the interest rate rises from 11.00% to 11.5% the corresponding increase in EMI will be Rs 211 from Rs 13,698 to Rs 13,909.On a personal loan of Rs 5 lakh with a tenure of 5 years, if the interest rate rises from 15% to 15.5% your EMI will increase by Rs 132 from Rs 11,895 to Rs 12,027.
Will the rate hike continue in future?
Even though rates have been hiked thrice, it does not look like the end. The primary factor which is fueling these rate hikes is inflation. The retail inflation in India, which is measured by CPI, is still on the higher side as CPI for the month of August was 7%.Till the time inflation comes down within RBI’s comfort zone, which 2-6%, it will be compelled to exercise the interest rate hike option among other inflation control options. Unless there is a durable sign of global inflation coming down, the rate hike cycle is expected to continue. Here is a look at what home loan borrowers should do now.
Avoid tenure extension if you can afford higher EMI
Whenever interest rates go up lenders prefer increasing the tenure of the loan instead of the EMI which is easy to administer operationally with their existing home loan borrower as they do not have to change the EMI mandate. However, this is not in the best interest of the borrower. Any extension in EMI increases your overall interest payable amount. You can easily save this by asking your lender to keep the tenure intact as you are ready to pay higher EMIs.If affordability is an issue get your tenure extended.
Home is one of the biggest assets many people will own in the lives, and for some it is their only big asset.
So when buying a home most home buyers stretch their financial capacity to get their dream home and end up taking highest possible home loan. Many such borrowers at the initial phase of the loan may not be comfortable with the sharp increase in EMIs. Such borrowers may explore the option of tenure extension with their many circumstances, lenders rather than increasing the EMI amount prefer that the borrower opts to extend the tenure if there is scope. This usually happens with home loans with shorter tenures. If the loan is taken for 15 or 20 years, lenders usually extend it to 20 or 25 years. In case of home loans with tenure of 25 years or 30 years the scope for tenure extension remains there is another factor which determines if your loan will get a tenure extension or not – how far you are from retirement, i.e., your age. If the borrower has a long time left for retirement, then the lender will typically increase the tenure of the loan. For instance, if you have taken a home loan for 20 years when you are 35 years old, then the lender can increase the tenure up to 5 years so that it goes up to the usual retirement age of 60 years.
If you have savings or investment which is earning lesser return than the interest rate that you are paying on our home loan.
Go for partial prepayment
then it is better to use it to partially prepay your home loan to control the EMI outgo. However, you have to factor in the tax benefit that you get on your home loan interest payment and principal repayment. If the net benefit is higher in prepayment you should go for prepayment. Else you can keep your investment time like this, it is advisable to pre-pay in any shape and form to control your interest outflow. You could cut down non-essential expenses to save money for pre-payments. With pre-payment, borrowers may feel the pinch in the short term, but they will be better off once the rate cycle reverses.
Foreclose high interest outstanding
Besides the home loan if you have taken costly loans like personal loan, consumer durable loan, two-wheeler loan, used car loan or revolving credit from credit card, then rather than prepaying your home loan, which is the least costly loan, you should prefer foreclosing these costly loans to reduce the overall EMI burden in your monthly household budget.