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RBI Hikes Interest Rates. What Can Home Loan Borrowers Do?

The RBI hikes interest rates. What Can Home Loan Borrowers Do?

The Reserve Bank hiked the repo rate in the first week of May 2022. Still, you’ll soon see one of the following effects: if your home loan is linked to the repo rate or any external standard.

EMI stays constant and the outstanding loan term goes up( that is generally the dereliction action). OR
The loan term remains unchanged, but the EMI goes up.
Neither is good for you. Under( 1), you pay EMI for a lesser number of months. Under( 2), you feel the pinch right down as the EMI goes up. Either way, you end up paying more over the loan term.

By the way, indeed, if your home loan interest rate isn’t linked to an external standard(say, linked to MCLR), anticipate no relief. The banks are always veritably keen to pass on the rate hikes.

What Can You Do?

Be set for further similar rate hikes. Though I’m no expert, I’ll be surprised if the RBI stops at just one hike. You can anticipate many further rate hikes. With each hike, your home loan interest rate goes up. With the increase in interest rates, your loan EMI goes up, or the loan term increases by many months.

Over the past couple of years, we’ve gotten habituated to low home loan interest rates. This trend may reverse( no guarantee). As a borrower, you must be prepared. You must see how your cashflows would look if the rates were to go up further. Prepare consequently.

Or if you want to keep the EMI or the loan term unchanged, you must compensate a portion of the loan. In the table below, I’ve calculated the impact of the rate hike on the EMI and the loan term. It has also shown the quantum of repayment needed to keep the loan term and EMI unchanged.

I am considering a home loan of Rs 50 lakh. Loan term of 15 times( 180 months) and an interest rate of6.5 6.5%

Your home loan quantum may be different. Still, if your loan term and interest rate are the same, you can easily calculate the change by considering these figures proportionally. For example, if your loan quantum is 20 lacs and the interest rate moves from 6.5 to 7.5 percent, your EMI will go up by 20/50 * 2,795 = 1,118. Alternatively, just go to the loan calculator and calculate the impact of your loan.

While I write that you can compensate the loan incompletely and keep the EMI or term unchanged, this may not be an option for all of us. There are significant totalities involved. However, you can use the plutocrat for repayment to reduce the impact if you have idle cash lying around. Note that repayment doesn’t mean that you aren’t affected by the rate hike. You still are. For example, if the loan interest rate goes to 7.5, you must make a repayment of Rs 3 lacs to keep the EMI/loan term. That’s Rs 3 lacs redundantly paid.

How? If the loan interest rate hadn’t changed from 6.5 to 7.5 sire, you would have paid Rs 43,555 for 180 months. After the rate hike, you still pay that. And you pay Rs 3 lacs over and above. Hence, it’s a megahit.

More importantly, you can’t do much about interest rate hikes. The key is, how do you manage it? The way EMI computations work, hell won’t break loose for most borrowers. For this case, for 1 hike, the EMI goes up from 43,555 to 46,375. An increase of Rs 2,735. Should be manageable unless you’re running a veritably tight boat. Budget for further hikes. The RBI may not hike further, but that’s what fiscal planning is all about: being prepared for adverse events.

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