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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 to any external standard.

  1. EMI stays constant and the outstanding loan term goes up( that is generally the dereliction action). OR
  2. 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 further 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 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 1 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 once couple of times, 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. Have also shown the quantum of repayment needed to keep the loan term and EMI unchanged.
I consider a home loan of Rs 50 lacs. Loan term of 15 times( 180 months) and the interest rate of6.5 sire

Your home loan quantum may be different. still, if your loan term and interest rate are the same, you can fluently calculate the change by considering these figures proportionally. For case, if your loan quantum is 20 lacs and the interest rate moves from6.5 to7.5 sire, your EMI’ll 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/ 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. Note that repayment doesn’t mean that you aren’t affected by the rate hike. You still are. For case, 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 redundant paid.

How? If the loan interest rate hadn’t changed from6.5 to7.5 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, the hell won’t break loose for utmost borrowers. For case, 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. RBI may not hike further but that’s what fiscal planning is each about, being prepared for adverse events.

Don’t dip too much into your exigency fund to reduce the outstanding quantum. exigency fund isn’t meant for similar operations.
still, particular loan, etc, If your loan is a fixed rate loan( auto loan.), you need not bother. Your loan interest rate will remain constant. In any case, the hike in interest rates affects long-term loans more.

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