RBI repo rate hike: What should home loan borrowers do as EMIs go up?


Home loan EMIs set to rise! The Reserve Bank of India has hiked the repo rate by another 25 basis points taking it to 6.5%. The rise in repo rate will lead to change in the way you repay your home loan – whether in terms of an increase in monthly EMIs or an increase in the loan tenor.
So what should a home loan borrower do? Should you opt for an increase in EMI, tenor or look to pre-pay your loan? Experts are of the view that what matters is the timeframe in which you intend to repay the loan. The silver lining is that the RBI is expected to pause on its rate hike cycle in the coming months, given that inflation is moderating. Hence, today’s hike in repo rate is likely to be the last hit to your loan for some time now.
Impact of RBI repo rate hike:
According to Adhil Shetty, CEO of BankBazaar, the repo rate hike will burden 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 and others costlier, and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both.
He explains, “when the repo rate rises, it becomes more expensive for banks to borrow from the central bank, and as a result, they often pass on the increased cost to their customers in the form of higher interest rates on loans. It means that loan borrowers may have to pay more in interest, which can increase their monthly repayments.” “This can affect their financial situation, especially if they have multiple loans or a limited income,” he adds.
What should a loan borrower do?
Adhil Shetty recommends three important things to note when dealing with the hike in repo rate:

  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, if 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,” he says.


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