Rising Monthly Inconvenience

Increase of the repo rate by the RBI has hit home loan consumers hard. But there’s a way out

THE RECENT 50-BPS rate hike by the Reserve Bank of India (RBI), the fourth rate hike since May, has increased the repo rate—the rate at which commercial banks borrow from it—by 190 basis points in all to touch 5.9 per cent currently. V. Swaminathan, Executive Chairman of Andromeda and Apnapaisa.com, which are in the business of loan distribution, says, “The cost of borrowing will increase, pushing banks and other financial institutions to increase their lending rates, making EMIs costlier. People opting for home loans should be very cautious and calculative in times such as these.” SBI, ICICI Bank and HDFC have already increased their home loan interest rates; others will follow.

Home loan borrowers now have two options—increase their loan tenure (the default option), or increase the EMI. For example, an existing home loan borrower with an outstanding principal of `50 lakh and tenure of 20 years at 8.12 per cent interest, would have the loan period further extended by two years and three months at a new rate of 8.62 per cent (after the latest 50-basis point hike), which would further result in extra interest outgo of `11 lakh.

However, if one works out the impact on EMIs considering the 190-basis point hike since May, the picture looks gloomier. This is because assuming the same parameters, your interest outgo could increase by as high as `59 lakh on the loan of `50 lakh. Likewise, the tenure of your loan would have shot up by 13 years after four consecutive rate hikes since May.

However, if one opts for higher EMI, then the repayment schedule remains the same, but the EMI for the same loan (`50 lakh, 20 years) shoots up to `43,771 per month compared to `37,929 earlier.

Is there a way out? Adhil Shetty, CEO of BankBazaar. com, a marketplace for financial products, says that borrowers must prioritise pre-payments to control their loan tenure and interest. “Economies across the globe are grappling with recessionary trends. A time like this calls for people to calibrate their finances to adjust for these difficulties,” says Shetty. Agrees Swaminathan: “Borrowers would be well advised to pre-pay a part of their loan outstanding with surplus funds or increase their EMIs to cushion the overall interest outflow.”

Shetty explains further. Three months ago, if you took a home loan at 7 per cent for 20 years, that rate is now 8.9 per cent. Your balance 237 EMIs would rise to 410, which is 173 months or nearly 14.5 years longer. At this stage, if you made an immediate pre-payment 17 times your EMI, your tenure reduces to 236 months. Can’t afford that much money outgo? Well, four such pre-payments of 4.5 times EMI once every 12 months has roughly the same effect.

Now you know what to do.