Increased repo rate leads to higher interest on home loans: What can we do?

Date:

RBI increased the repo rate to pre-pandemic levels. This affects the borrowings from the bank and their interests. Home loans taken during the pandemic will suffer due to the increased rate of interest.

Reserve Bank of India (RBI) revised the repo rate again for the third time since May 2022. The repo rate is the rate of interest at which RBI lends money to banks and other financial institutions. The current repo rate has reached the pre-pandemic levels increasing the tension in borrowers. On the loans taken after 1 October 2019, there was an external benchmark set and that benchmark by the majority of banks was the repo rate. The rate of interest on home loans taken during the pandemic will be affected drastically. 

RBI has raised the repo rate by 50 basis points. This is the third time since May that the national bank revised the repo rate. In May it was increased by 40 basis points in June by 50 basis points and now again by 50 basis points. The repo rate was 7.55 percent which has now increased to 8.05 percent. This increase was made to overcome the rising inflation. 

What can we do high repo rate?

This rise though is very high it was expected as inflation is rising and the economy needs to recover. As the repo rate increases banks and other financial institutions will increase their rate of interest to combat the borrowing rate. Home loans will be the focus with raised interest rates. The tension regarding home loans has increased among borrowers. Here are a few things we can consider to reduce the tension. 

Increase the tenure

By increasing the tenure of your loan you will be paying the same equated monthly installments (EMI) for a longer duration. Choosing this option your monthly installments will remain the same but, the tenure, and period of borrowing will increase. Eventually, if you calculate you will pay a higher rate of interest but it will not affect your monthly finances. 

For example, you have taken a home loan of 50 lakhs for 25 years. With the current rate of interest, you are paying an EMI of ₹37,112. After the revision of the repo rate, this EMI will result in ₹38,757 considering the loan tenure of 25 years. 

If we increase the loan tenure, let’s assume by 50 months, keeping the EMI amount intact our period becomes 29 years and two months while the total interest increases by ₹18.57 lakh. In the first scenario, our loan burden increases by ₹4.93 lakh whereas if the loan tenure is increased the total burden is higher. 

Prepayment of Loan

If you are in a situation to prepay your loan, you can go ahead with this option. By doing this you will release your loan tension as well as not suffer the high-interest rate grudge. Many home loans taken earlier, during the pre-pandemic time, and are nearing the end can opt for this and get done. The stability of interest rates cannot be predicted and if you can fulfill this you can go ahead. 

Prepayment of the entire amount might not be possible for many in that case, a lumpsum amount can be prepaid. This will reduce the effect of an increased repo rate on your overall loan amount. 

Home Savers and Balance Transfer

Home Saver is a great option if you have low liquidity. Here an overdraft account will be created in either savings or current account form and you can deposit any extra surpluses you have. You are allowed to transact with this amount as per your financial needs. Your interest rate will be calculated based on the balance of this account. It is a safer option and a minimal relief can be enjoyed by the borrower. 

Transferring your home loan from one bank to another bank is called a balance transfer. Here you can transfer your home loan to a bank that is proving a lesser rate of interest. But while doing so you have to clear your balances, and transfer fees and charges are applicable so you have to be calculative to ensure no losses from our side. 

These are a few things that can help us ease the pressure of rising rates. The inflation has made it difficult to cope with our finances but with proper planning and analysis, we can gain a stable position. There are predictions of an increase in repo rate further but that will depend on the borrowings of the banks and financial institutions. No sign of which is seen. 

Sponsored

Neha Shah
Neha Shah
Neha is a young writer with a keen interest in business, economy and share markets. She has also written across genres like entertainment, technology and politics. Her writing can be described as simple and to the point.

Author
Latest

Technology

Business

Entertainment

Share post:

Subscribe

World News

Editor's Choice

Explained: What is moonlighting?
Put simply, moonlighting means taking up a second job or multiple other work assignments apart from an employee's full-time job. This practice is referred to as moonlighting. In other words, it can be termed as dual employment. What is the whole story? Moonlighting is a heated debate topic among Indians, especially Information Technology(IT) sector. So, the moonlighting story popped up in...

Popular