Rising Interest on Home Loans: How to Reduce Rising Costs Through Higher EMIs or Early Repayments


Rising Interest on Home Loans: How to Reduce Rising Costs with Higher EMI or Early Repayment

The Reserve Bank of India (RBI) raised the repo rate by 50 basis points in order to combat the country’s rising inflation. The most recent hike brought the repo rate back to the pre-epidemic level of 5.40%.

After adjusting off-cycle rates by 40 basis points in May and increasing lending rates by 50 basis points in June, India’s central bank has raised the repo rate three times in a row since May. Between May and August, the repo rate was raised by 140 basis points.

The Reserve Bank of India charges a repo rate when it lends money to banks and other financial entities. It should be noted that variable rate retail loans that banks authorize after October 1, 2019 are correlated to an external benchmark.

Most banks use the repo rate as an external benchmark. As the pension rate increases, interest rates on personal loans and mortgages will also increase. When bank borrowing costs rise due to the increase in the repo rate, home loans based on the marginal cost of funds based lending rate (MCLR) and base rate will become more expensive.

“The rise in RBI repo rates will result in higher interest rates for a variety of assets including home loans etc. This makes it more difficult for borrowers. As a result, borrowers would come under financial pressure, according to Freo’s chief risk officer Sujay Das.

The fastest transmission of policy rate hikes would be in mortgages and other retail loans linked to repo rates. According to Naveen Kukreja, co-founder and CEO of Paisabazaar, for new variable rate retail loans, transmission would be faster.

The precise date on which new home loans and other retail lending customers would get the higher key rates would depend on when banks set their rate reset dates in accordance with their regulations. Kukreja continued. Borrowers will be charged higher rates from their interest reset dates for existing variable rate loans linked to the repo rate.

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Following the RBI announcement on August 5, several institutions including HDFC Bank, ICICI Bank, Punjab National Bank (PNB), Bank of Baroda (BoB) and Canara Bank have already raised their lending rates.

What should mortgage borrowers do now?

Borrowers of existing home loans can adjust their monthly equivalent payments (EMI) or loan terms to mitigate the effect of rising interest rates. It should be noted that choosing the term extension option will cost more in interest than choosing the EMI increase option, Kukreja continued.

For example, let’s say you have a 25-year home loan for Rs 30 lakh at a rate of 7.55% per annum. The EMI is Rs 22,267 per month. The amended interest rate will be 8.05% following the most recent rate hike by the Reserve Bank of India. You will have to pay an EMI of Rs 23,254 at the revised rate. Therefore, your EMI will increase by Rs 987 per month. Throughout the loan, the interest charge will increase by Rs 2.95 lakh.how to pay off a home loan faster as home loan interest rates rise - the statesman

Most banks these days want to extend loan terms while maintaining stable EMIs. Therefore, if the term of the loan is extended by 36 months, the interest cost will increase significantly. If the interest rate remains at 7.55% and the repayment period is extended by three years, the interest charge will increase by Rs 5.39 lakh.

Early repayment of a home loan

Borrowers might consider prepaying to reduce the rising cost of interest. Current owners should repay their loans and, if possible, use the term reduction option, according to Kukreja, if they have large surpluses. Loan debt will be significantly reduced with regular payments. Borrowers with less cash can opt for the housing savings option. Under this arrangement, the borrower can designate a checking or savings account as an overdraft account, allowing them to make deposits and withdrawals as needed to meet their financial obligations. The amount in the savings or checking account is subtracted from the total amount payable on the mortgage to determine the interest component.

Another option is to transfer the money to a lender who charges a fair interest rate. Simply put, eligible customers can switch their mortgages to a bank that offers lower interest rates than their current lender. Kukreja advised current home loan borrowers who have seen major changes in their credit profile to consider lowering their interest charges through home loan balance transfers.how to reduce the impact of a higher interest rate on a home loan |  business news – indian tv

Remember that there may be additional costs associated with the process of transferring the loan balance from one lender to another, including a processing fee or penalty. Therefore, debtors should consider the pros, cons and savings before deciding to transfer their debt.

edited and proofread by nikita sharma


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