The Reserve Bank of India (RBI) on Wednesday increased the repo rate-the rate at which banks borrow from the Central Bank- by 0.35 percentage points to 6. 25 per cent in Monetary Policy Meeting concluded today. Following the rate hike by the Central Bank, the credit cost for both existing as well as fresh home loan borrowers will increase by 0.35 percentage points.
With the increase in home loan rate your monthly instalment will also go up leaving less discretionary cash in your wallet. For example, if you have a 20-year-loan of Rs 50,000 at the rate of 8.62 per cent then your existing EMI will increase from Rs 43,771 to Rs 44,889 at the revised rate of 8.97 per cent. But if you look at the total increase, considering the five successive rate hikes (2.25 percentage points) by the regulator, the total increase in EMI comes to around Rs 7,000 in the span of just seven months.
What to do in the scenario of rising interest rates? “Prepaying your home loan as and when funds are available can do wonders and shorten your ballooning loan tenor. For example, if you pay 5 per cent 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 per cent 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,” says Adhil Shetty, CEO, BankBazaar.com.
As per Shetty, one could also consider refinancing their home loan if the rate is not in sync with the market or one's credit profile. "A difference of 50 basis points warrants a look. This implies the borrower incurs an additional Rs 668 monthly for the same home loan repayment. And they would have to shell out Rs 1.60 lakh over the entire duration of the loan amount," he says.
If you do not want to increase the tenure of the loan it is better to increase EMI provided it does not hurt the family cash flow. The default option of most of the banks is, however, to increase the tenure of the loan.
“Take a look at how this will impact a borrower who has taken a loan of Rs 30 lakh on a 20-year period at 8.50 per cent. Currently, they would be paying Rs 26,035 as EMI. But if we factor in the 0.35 percentage point increase due to repo, the new interest rate would jump to 8.85 per cent , making the EMI amount Rs 26,703," says V Swaminathan, Executive Chairman of Andromeda Loans.
Also Read: RBI's repo rate hike: Home loans set to get costlier