How will the RBI’s repo rate hike impact your home loan?

The RBI raised the repo rate by 40 basis points. This increase will result in higher equivalent monthly payments, or EMI, on new home loans.

For existing borrowers, the term will increase, resulting in a higher interest charge. But if the seniority limit – usually the retirement age for employees and 65 for the self-employed – is exceeded, their EMI could also increase.

Interest rates are headed up.

Anarock Group chairman Anuj Puri said the RBI’s rate hike signaled an imminent end to the all-time low interest rate regime which has been a major driver of home sales in across the country since the start of the pandemic.

Experts believe that rates will continue to tighten for some time, given the high and persistent nature of inflation.

Existing borrowers should avail themselves of scheduled prepayments.

According to BankBazaar CEO Adhil Shetty, existing borrowers should use any windfall or savings to prepay their loans. Borrowers should aim to prepay 5% of the loan balance every 12 months, he says. By prepaying at this optimal rate, the term of the loan could be reduced from 20 years to 12 years.

Borrowers who still have a loan tied to the marginal cost of funds-based lending rate, or MCLR, should switch to a loan tied to the repo rate after careful calculation.

Shetty says that unless the difference is more than 50 basis points, you can stay put under certain circumstances.

EMIs on pension-indexed loans are expected to be revised from next month.

An MCLR-linked loan can be reset after several months, assuming your loan is linked to a 12-month MCLR. Therefore, do a detailed cost analysis before switching.

Home loan balance transfer can also reduce your interest burden.

Aditya Mishra, Manager – Home Loan Office at 4B Networks, advises that the assessment regarding whether to transfer the loan should be done quarterly. If you have more than 15 years of tenure left, switch if there’s only a 25 basis point difference between your current rate and the best rate you can get. If 5-10 years left, switch if there is a difference of about 70 basis points. And if there are 10-15 years left, the difference should be 50 bps.

In a rate hike scenario, mortgage finance companies whose lending rates are not tied to an external benchmark could increase their rates by more than the amount of the repo rate hike.

MyLoanCare founder and CEO Gaurav Gupta believes new borrowers would be better off opting for a repo rate-linked loan rather than a prime-indexed loan.

Banks, whose rates are linked to an external benchmark, could potentially increase their loan spreads for new borrowers.

Sanjay Kumar Singh from Trade standard says HFC loan rates could climb at a faster rate than the rate at which the repo rate increases
and borrowers should stick to the repurchase rate linked loan.

According to experts, comparing rates becomes crucial in a rate hike scenario. They suggest that one should budget for higher rates in the future. And avoid over-indebtedness in these circumstances. A rate that seems cheap today may not remain so in the future. Higher interest rates will reduce the loan amount for which new borrowers are eligible. Be prepared to arrange a higher down payment. Finally, with prepayment becoming crucial, opt for a lender that offers easier prepayment terms.

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