After rate hike, ask your lender to increase home loan EMI, not tenure

Interest rates on home loans are set to rise once again with the Reserve Bank of India (RBI) hiking the repo rate by 50 basis points (bps) to 5.4 per cent. After the latest hike, the repo rate has increased by 140 basis points in the current rate hike cycle.

A few lending institutions such as ICICI Bank, Bank of India and Indiabulls Housing Finance had hiked their rates a few days ahead of the RBI’s Monetary Policy Committee (MPC) meeting. After the RBI’s measure, expect players across the board to hike their rates, resulting in higher burden for home loan borrowers.

What’s more, there seems to be a consensus among economists and financial market experts that RBI is not yet done with the rate hike cycle. According to a recent report issued by Pranjul Bhandari, chief economist, India, HSBC Securities and Capital Markets, the repo rate may go to 6 per cent by the end of the current calendar year.

Immediate impact

A 50-bps hike on a Rs 50 lakh loan of 20-year tenure would increase the EMI by Rs 1,545.

“The repo rate may soon touch 6 per cent if inflationary pressures persist. The lowest home loan rates have been at a premium of around 250 bps over the repo rate. If that remains true, in the coming days, the lowest home loan rates would be around 7.9 per cent with the repo rate at 5.4 per cent, and around 8.5 per cent if the repo rate touches 6 per cent,” says Adhil Shetty, chief executive officer (CEO), Bankbazaar.

Samantak Das, chief economist and head of research and REIS, India, JLL, says that the increase in home loan rates would be slightly lower than the uptick in the repo rate. “The likely increase of another 30-40 bps in home loan rates may cause some mid-cycle slowdown for the residential sector,” he says.

Options for existing borrowers

If you are an existing customer, don’t panic. Home loans have a long tenure of 15 years and above. During it you will encounter many interest-rate cycles.

“Borrowers can either opt for the tenure increase option or the EMI increase option with the consent of the lender. Opting for tenure increase will result in higher interest cost than the EMI increase option. Existing home loan borrowers with adequate surpluses should prepay their home loans and preferably opt for the tenure reduction option to generate higher savings in interest cost,” says Naveen Kukreja, CEO and co-founder, Paisabazaar. Whenever you get a bonus or maturity proceeds from an old investment, use it to part prepay the home loan and reduce the loan tenure.

Borrowers can also explore balance transfer options. “Borrowers who have witnessed substantial improvements in their credit profile should explore the possibility of interest cost savings through home loan balance transfer. Their improved credit profile may make them eligible for loans at much lower rates from other lenders,” says Kukreja.

New loan borrowers

A person planning to take a home loan now must be extra careful about his repayment capacity. While interest rates won’t keep going up always, don’t expect them to moderate quickly either. “Evaluate your own readiness. At some point, interest rates will moderate or even fall and things will get easier. You should be able to get through to that point without getting into financial trouble now,” says Shetty.

Most financial planners suggest that the sum total of all your EMIs shouldn’t exceed 35-40 per cent of your take-home salary.

If you have taken a pre-approval for a home loan a couple of months ago, re-check with the lender the loan amount you can avail of at the revised rate of interest. The interest rate at the time of disbursal matters, not what is written on the pre-approval letter.