The Reserve Bank of India (RBI) increased the repo rate by 25 basis points on 6 June 2018. Even before the RBI announced the rate hike, some banks like State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank Ltd. and Kotak Mahindra Bank Ltd. increased their marginal cost of funds based lending rate (MCLR) by upto 10 bps. As a result, the EMI is expected to go up soon. Are you anxious about its impact on your outstanding debt? Here is a guide to help you deal with the pressure of home loan rate hike.
Increase EMI & retain tenure
Most lenders generally extend the repayment tenure of the loan when lending rate goes up. Even if you don’t feel the impact of interest immediately, the fact is that your interest load will mount with the passage of time. The borrower should consider increasing his/her EMI amount over increasing the tenure of the loan. By increasing EMI, the borrowers can control the interest outgo and save a lot of money.
Home loan Rs. 60 lacs
Rate of interest 8.5%
Original tenure 20 years
EMI Rs. 52,069
Total interest payable Rs. 64,96,655
If the home loan rate is increased
New rate of interest 8.75%
New tenure 21 years
Interest payable Rs. 71,29,376
Additional interest Rs.6,32,721
To deal with this, increase the EMI
Original EMI Rs. 52,069
New EMI Rs. 53,023
Interest payable Rs. 67,25,434
Extra payment p.m. Rs. 954
Saving in interest Rs. 403942
Switch your lender
It is always good practice to shop around for the best deal. Compare the rate of interest that you are paying with what other lenders are offering. If others are offering a lower interest rate, then you can explore transferring the loan to other banks. If the difference is not significant, do not transfer the loan as you could get into unnecessary trouble. Ideally, the difference should be at least half the percentage.
Go for prepayment
There is no denying the fact that customers can save a lot of money on interest by repaying their home loan before the tenure.
For example, if you have taken a home loan of Rs. 30 lakhs at an interest rate of 11%, your monthly EMI would be Rs. 30, 966. By the end of the 20 years, you would be required to pay Rs.74,31,756 out of which Rs. 44,31,756 would be just the interest rate, while the interest rate paid would be Rs. 19,59,000 out of Rs. 49,59,000 in case of a 10-year tenure. So, there is a staggering difference of Rs. 24,72,756.
Moreover, if the borrower has excess of cash, it is always good practice to prepay the loan.
Avoid the potential pitfalls
Finally, don’t let the increase in rate hold you back from taking a fresh home loan or opting for balance transfer. Also, be aware of the mistakes that most borrowers tend to make i.e. they sign up for a fixed-rate loan in the backdrop of the current rate hike. This kind of hasty decisions may prove a serious problem in long term. Borrowers with fixed interest rates will not be able to move to floating rates and refinancing will not be a great option later as fixed rates will attract foreclosure charges, making it a more difficult proposition.