The good news is Reserve Bank of India (RBI) has kept repo rate- – the rate at which banks borrow from the Central Bank- unchanged while concluding the three-day Monetary Policy Committee meeting on Thursday. RBI has revised the repo rate six times since May 2022, increasing the key policy rate by 250 bps to 6.50 per cent.
While no hike is good news for borrowers, there is still a need to keep interest payment in control because of already high interest rates. For example, on a home loan of Rs 50 lakh for a tenure of 15 years at 7 per cent, one is already paying a revised EMI of Rs 52,211 compared to the old EMI of Rs44,941 a jump of Rs 7270. Another way for an existing home loan borrower to deal with high interest rates is by extending their tenure. In this example, your tenure has already risen by 7.5 years, with an increase in interest rate by 2.50 per cent to 9.50 per cent. One of the flip sides of extending the tenure is the increase in interest outgo. One will have to pay extra interest of Rs 40 lakh at the cost of increasing the tenure of the loan.
Given that tenure of loans has alreday increased substantially and going beyond the working age of borrowers, banks have now resorted to increasing EMIs in a default mode. For example, with the rise in rates, your EMI per lakh has increased by Rs 145 per lakh, assuming you took the loan at 7 per cent for a tenure of 15 years.
How to save interest cost?
Though the RBI has decided to keep the repo rate unchanged at 6.5 per cent it has also showed readiness to act if the situation so warrant. This is contrast to what many economists had predicted. A Reuters Poll had predicted a rate revision of about 25 bps. Of the total 36 respondents, 20 expected the central bank to continue its ‘withdrawal of accommodation’ stance, while the remaining 16 predict a shift towards a neutral stance.
“The RBI Monetary Policy Committee’s decision to keep the repo rate unchanged at 6.50 basis points is a welcome move. Following the steep 250 basis points hike over the last year, retail loan rates have gone up. So much so, that in some cases, home loan borrowers have seen their tenors increase from 20 years to 50 years. Since lenders could not increase the tenors beyond the retirement age, the only option that remained was to increase EMIs, which may not be feasible for all borrowers,” says Adhil Shetty, CEO, BankBazaar.com
Increase EMI
When considering whether to increase EMI or tenure, it’s important to make a decision based on your budget. If you’re already tight on funds, it may be better to increase your tenure without compromising your spending and savings. However, if you have extra funds, increasing the tenure can be a viable option as long as you invest the additional amount for generating higher returns.
Prepay
If you have a lump sum amount, you can use the prepayment facility to repay your loan before the actual repayment tenure. However, before making a prepayment, consider the tax benefits you’re currently availing of on home loans. For instance, you can get a deduction of up to Rs 2 lakh under section 24 of the Income Tax Act towards interest payment, which is over and above the 80C deduction limit of Rs 1.5 lakh towards principal payment.
Refinancing
Paying higher EMI or pre-paying may not be enough. You can also consider refinancing loan with your own bank or another bank.
“On home loan interest rates, even as the benchmark repo rate has increased, spreads have fallen. Spreads are what banks charge over and above the repo rate. Today, the lowest spreads over the repo are 1.90-2.00%. Having a lower rate helps in pulling back your rising loan tenor and thus save your money. You can also consider voluntarily hiking your EMI, and pre-paying wherever possible,” says Shetty.
According to a report from BankBazaar.com “Refinancing early in your loan tenor—typically in the first half— makes more sense. This is when your EMIs focus on interest payments. Therefore, a lower rate will lead to big savings. Often the biggest part of the home ownership cost is loan interest. A loan cheaper by around 50 basis points or more could lead to a shorter loan tenure, lower EMIs, and large savings.”
Another reason to refinance could when you need a new benchmark, as BanBazaar.com report states that home loans linked to older benchmarks such as MCLR or Base Rate may be costlier compared to home loans linked to the repo rate. Currently, as directed by the Reserve Bank of India, all banks are required to benchmark their new loans against external benchmarks, such as the RBI’s repo rate or the Government of India’s 3-month Treasury bill yield published by Financial Benchmarks India Pvt. Ltd. (FBIL).
Source: businesstoday.in