What should home loan borrowers do now as RBI hikes repo rate again?

The Reserve Bank of India (RB) hiked the repo rate for the fifth consecutive time in its monetary policy review meeting today. The revised repo rate now stands at 6.25%. Besides making car loans, personal loans and other loans more expensive, the hike now makes home loans costlier for both new and existing borrowers.

Over the past year, interest rates have increased by 190 basis points and another 35 basis points, bringing the total increase to 2.25 basis points. In such a situation, if you have taken a home loan at 6.75% a few months ago, then the same loan will now be available at 9%. This is a big jump within a year as the apex bank has been aggressively engaged in controlling the rising inflation in the country for the last few months.

The latest repo rate hike will lead to higher equated monthly installments (EMIs) as banks will now pass on the increased lending rates to customers. This means homebuyers will now have to rethink their strategies to either fully or partially prepay their loans to reduce the high interest burden on their loans, considering the 2.25 basis points hike. have to work from Since the tenure has already extended for most of the borrowers, the only option now would be to increase the EMI. If you choose a longer tenure, the interest will be much higher. Here’s what homebuyers can do to reduce their EMI burden!

Experts are now favoring the idea of repayment to reduce the overall interest hike. If you have a surplus or you have funds to repay some amount, it can reduce the burden of increased EMI. If arranging additional funds for repayment is challenging, borrowers can opt to increase their EMIs by a certain percentage every year to handle the increased interest payments. Here are tips to help you manage rising home loan interest rates.

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.

This can do wonders and shorten your incremental loan tenure. For example, if If you pay 5% of the loan balance each year, you can pay off your 20-year loan in 12 years.Paying an additional EMI every year can close your loan in just 17 years, and if you If you increase your EMI by 5% every year, you can complete your loan in less than 13 years. Increasing your EMI by 10% every year can close your loan in about ten years. Lastly, if your rate You can also consider refinancing your home loan if it doesn’t suit the market or your credit profile. A difference of 50 basis points is worth looking at.

Refinance with your own lender

 There may be a processing fee of a few thousand rupees, but it is quick and without much paperwork.

Refinance with another lender

If you are getting a good deal, you can go for a balance transfer with another lender. 

Choose the option to pay higher EMIs

It is advisable to voluntarily opt for paying higher EMIs. This will help you pay off your loan faster. However, you will have to manage the higher monthly EMIs.

Pay an additional EMI once a year

Paying an additional EMI at the beginning of every year can bring down your interest significantly. This helps in paying off your loan faster.

Pay 5% of the annual loan balance

Prepay 5% of the loan balance once every 12 months. Cost: Simple interest. Pros: The loan is repaid faster.

Pre-close if the rate is too high

Eventually you can prepay the loan in full. It ensures protection from financial stress. However, you may not be able to claim tax benefits and this may result in loss of savings.