RBI Repo Rate Hike: Know What Should Home Borrowers Do As EMIs Expected To Rise

It is expected that banks will also increase the interest rate in retail loans, and also increase the tenure of the loan which means the higher the remaining tenure of the loan, the higher the EMI

The Reserve Bank of India (RBI) has increased the repo rate by 25 basis points taking it to 6.5 per cent for the sixth consecutive time since rates were increased in May 2022. With the repo rate hike on Wednesday, it is expected that banks will also increase the interest rate in retail loans, and also raise the tenure of the loan which means the higher the remaining tenure of the loan, the higher the EMI.

So, it’s crucial for home loan borrowers to know how it will affect the repayment of home loans in terms of an increase in monthly EMIs or an increase in the loan tenor. With the repo rate hike, the banks will now have to pay a higher amount of interest to the RBI which the bank will recover from the retail/ corporate borrowers of the banks. "This would result in higher interest outflow on loans taken from the banks. Thus the loans, in general, will become costlier by 1-2 per cent," Archit Gupta, founder, and CEO of fintech SaaS firm Clear explained as saying in the publication Livemint.

How it will impact borrowers?

Experts hold that the timeframe in which you intend to repay the loan is important to consider. It is also expected that the RBI may pause its rate hike cycle in the coming months as inflation is moderating. It is widely expected that the latest hike in repo rate may be the last hit to your loan for some time now.

The repo rate hike will prove to be a burden for existing borrowers, and new borrowers who will end up paying higher interest rates. “Retail loans such as home, auto, and personal loans and others will become expensive, and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both,” Adhil Shetty, CEO of BankBazaar has been quoted as saying in publication Times of India.

What should home borrowers do?

There are factors to note when dealing with the hike in repo rate, according to Shetty. He suggests raising EMI once a year by 5 per cent as it will bring down the tenor by a few months. Next year, take stock and repeat the dose if required.

Secondly, a 20-year loan can be repaid in 12 years if chose to pre-pay 5 per cent of the loan balance once a year. One can also opt to go faster or slower depending on the financial situation. Shetty advises that home loan being a low-cost loan so it makes sense to repay it slowly by balancing your investing needs. He said the markets gave 12 per cent returns over the long-term and a home loan cost with tax deductions may be 5-7 per cent  a year.

Moreover, it is the timeframe that is also considered important in which you intend to repay the loan. For example, if you intend to repay a 20-year loan in 10 years but the rate hikes have taken your tenor to 25 years then in this case, is suggested that for the next 10 years, you pay back at least 10 per cent of the loan through a combination of EMIs and pre-payments. "This will keep you on track for your goal," he added.

Atul Monga, co-founder and CEO, BASIC Home Loan told TOI that home loan borrowers can also opt for a floating rate of interest which rises and falls along with the market. Mongia also suggested prepaying loans, especially earlier in the loan tenor when the interest component also remains high. “Even if the interest rates are higher and you pay more than your EMI, it will reduce your principal amount and your overall interest charges will go down,” explained Monga.