How To Manage Home Loan EMI As Interest Rate Go Up Due To Repo Rate Hike?

Home loans have helped many to build a house of their own. Depending on the housing loan interest rate and loan tenure, the EMI or Equated Monthly Instalments are fixed for home loan borrowers. Even before availing of a home loan from the lender of their choice, one can use a home loan calculator to calculate the EMI they have to pay.

Calculation of home loan EMI will give a clear idea about the amount you have to pay and help you make an informed decision about choosing a suitable home loan. In a home loan calculator, the EMI of a home loan is calculated using the principal amount, interest rate and loan tenure.

Repo Rate and Home Loan Interest Rate

Housing loan interest rates are dependent on the repo rate determined by the Reserve Bank of India (RBI). The Repo rate is the rate at which the banks borrow money from RBI. When RBI raises the repo rate, banks and housing finance companies will increase the lending rates. This will result in the increase of home loan interest rates as well.

RBI has increased the repo rate by 40 basis points. As a result, the housing loan interest rate may increase by 30-40 basis points. If a home loan borrower has opted for a floating rate loan, an increase in the repo rate will directly affect the home loan's interest rate. It is to be noted that if the lender doesn’t make you aware of the home loan interest rate revision, it is possible they might have already increased the loan tenure without letting you know.

To counter the effects of an increase in the home loan interest rate, either the loan tenure should be extended, or the EMI should be increased. Banks prefer choosing to increase the loan tenure as it is easier and hassle-free for the bank.

How To Manage Your Home Loan EMI

If you have taken a home loan and heard about the hike in the interest rate, you must be thinking about whether to extend the tenure or increase the EMI. If you can afford it, it is better to increase the EMI. As a result, your home loan will close on the original schedule. Make sure this doesn’t hurt your monthly budget.

As per the experts, there will be more hikes in the interest rates in future. For home loan borrowers, it is advisable to either increase the EMI or even make prepayments to ensure that their home loan tenures stay close to the original one. If you retain the current EMI without making any prepayments, it could result in the extension of the loan tenure by more than a decade, and you may end up paying double the cost of the loan.

Let us take an example to understand this clearly.

Suppose you have an outstanding loan of Rs. 50 Lakh loan at 7% interest rate and a remaining tenure of 10 years. If the interest goes up by 40 base points and if the interest remains 7.4% for the rest of the tenure, you would need to pay around Rs. 1,000 over your current EMI to close the loan on the scheduled time.

If you are not ready to increase your EMI, then your tenure will go up, and you will have to pay for four additional months to close your home loan. If you have kept the EMI the same and the housing loan interest rate increases to 8.5% in the next 12 months, then the loan tenure may get extended by 12-14 months.

If your budget is not flexible enough to increase the EMI, it is better to make prepayments. It is a good option since it will ensure your loan tenure stays close to the actual schedule even if you keep paying the same EMI. Making prepayments will also help you spend less on the interest component of the loan.

Disclaimer: Above mentioned article is sponsored feature, This article is a sponsored publication and does not have journalistic/editorial involvement of IDPL.