Impact of rising interest rates: try to repay your mortgage early

Home loans and other retail loans will become more expensive as the Reserve Bank of India raised the repo rate by 50 basis points (bps) on Wednesday, the second rise in two months, taking it to a total hike of 90 bps. Typically, loans linked to repo rates have a faster transmission of rate increases, which is faster for new floating rate loans.

For existing variable rate loans linked to the repo rate, higher rates will be charged based on borrowers’ interest review dates. Until then, they would continue to pay their existing interest rates.

Impact on mortgages
A 50 basis point increase in the repo rate will raise the EMI on a Rs 30 lakh home loan with a term of 20 years by Rs 910. Similarly, for a loan of Rs 50 lakh for the same duration, the EMI will increase by Rs 1,517 and for a loan Rs 1 crore, the increase will be Rs 3,035.

With the total increase of 90 basis points in the repo rate, the EMI on a Rs 30-lakh home loan will increase by Rs 1,627, Rs 2,711 for a Rs 50-lakh loan and Rs 5,422 for a Rs 1-crore loan, all for a term of 20 years. If borrowers choose not to increase the EMI, the term of the loan can increase up to 46 months.

Auto loans will also become more expensive for new borrowers. A 50 basis point hike in the repo rate will raise the EMI for a seven-year car loan of Rs 10 lakh by Rs 347. However, those who took out a fixed interest rate loan will be spared.

Start prepaying
Any change in the benchmark external lending rate, such as a repo rate, will result in faster transmission compared to the marginal cost of the funds-based lending rate, where rates are reset quarterly. If a borrower has a variable rate loan, the EMI may be fixed for the term, but the term itself will increase as interest rates rise.

Home loan interest rates, which had bottomed out at around 6.5% in April, will now approach 7.5% in June. Adhil Shetty, CEO of BankBazaar.com, says the key is to repay the loan on time. “Use prepayment methods such as EMI increases or lump sum payments to control your interest burden,” he says.

Chaitali Dutta, founder of AZUKE Personal Finance Advisory, said borrowing for discretionary spending could drop and retail borrowing is expected to be hit with only end-user accepting home loans. “To avoid paying additional interest throughout the term of the loan, and if cash flow permits, it would be better to increase the EMI than to increase the term of the loan,” she says.

Alternative options
New and existing home loan borrowers with limited cash can opt for the home ownership savings option in which an overdraft account is opened where a borrower can park their excess and withdraw it as per their financial needs. The interest component of the loan is calculated after deduction of the surpluses parked in the account of the outstanding amount of the mortgage.

Naveen Kukreja, CEO and Co-Founder of Paisabazaar.com, says that many existing home loan borrowers may have seen a substantial improvement in their credit profile due to improved credit score, job or their income profile after receiving a home loan. “These borrowers should explore the possibility of saving on interest charges through home loan balance transfer. Their improved credit profile may make them eligible for home loans at much lower rates from other lenders” , he said.

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