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Rate hike : Pre-pay your home loan or pay a high EMI

The Financial Express logo The Financial Express 07-08-2022 Anish Mondal
The impact will be more for recent borrowers. © Provided by The Financial Express The impact will be more for recent borrowers.

In the current rate hike cycle, the third since May 4, the Reserve Bank of India has increased the repo rate by 140 basis points to 5.4%. All existing and new home borrowers on a floating rate have to pay higher interest amounts as banks increase their lending rates immediately. The impact will be more for recent borrowers.

Borrowers, especially those with a long tenure home loan, should start repaying or increase their EMI or even look at balance transfer to reduce their interest burden. However, many new borrowers will have to increase their tenure as they may not have the money to repay as they would have stretched their finances to pay the margin money to buy their dream home.

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Higher payoutsWith the 140 basis points increase in repo rate, assuming the home loan rate moves from 7% to 8.4%, the EMI for a loan of Rs 50 lakh for a tenure of 20 years (new loan) will increase from Rs 38,765 to Rs 43,075. The total interest payable will go up from Rs 43 lakh to Rs 53 lakh over the entire period. If a borrower goes for an increase in tenor, then it will go up from 240 months to 334 months, a sharp increase of 94 months.

New borrowers need to be careful as they had borrowed at rock-bottom rates of 6.5-7.5% in the last two years. Their loan tenors may increase substantially as the interest rates rise. In floating rate loans, EMIs remain constant, and it’s normally the tenor that adjusts for the rate change.

Adhil Shetty, CEO, Bankbazaar.com, says the question borrowers may ask now is if their home loan rate is too high. “One of the ways you as a borrower can evaluate this is by checking the premium you are paying above the repo rate. If you are a prime borrower (credit score over 750, stable income, loan payments on time), you can get home loan offers at a premium of 250-275 basis points over the repo rate. So based on the rates we’ve seen in recent months, the lowest rate at which you can get a home loan now may be in the 7.9-8.15 range,” he says.

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The range could be lower or higher depending on the borrower’s profile and credit history and the bank’s lending policy. “If you’re already in that zone, you may focus on pre-paying and voluntarily paying a higher EMI to control your ballooning interest. If you are beyond this comfort zone, you may also want to consider a refinance with your own lender or with another one offering you better terms,” says Shetty.

Existing borrowers should not wait for years to accumulate a large amount to prepay. Instead, they should start prepaying after keeping adequate liquidity for any emergency needs. Borrowers with limited liquidity can opt for the home saver option in which an overdraft account is opened where he can park his surpluses and withdraw from it as per his financial requirements.

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