MUMBAI: With the Reserve Bank of India (RBI) raising the repo rate by 25bps, the banks are set to raise interest rates for different loans for existing and new borrowers. For existing home loan borrowers, it means higher Equated Monthly Instalments (EMIs). However, it is possible to keep your home loan EMI at the same level even when the banks raise interest rates.
Last week, RBI Governor Shaktikanta Das announced to raise the repo rate, the rate at which the RBI lends money to commercial banks, to 6.50% from 6.25% in its fight to tame inflation. The latest hike, the sixth such hike since May 2022, in the repo rate will make home loan EMIs expensive by around 2-4%. The increase in EMIs for existing home loan borrowers will be higher if we consider repo rate hikes by the RBI since May last year. The central bank has increased the repo rate by 250 bps in the past nine months. Experts suggest some ways which will help you to keep monthly instalments at the same level.
Make prepayments
Making prepayments on your home loan is a great way to reduce the outstanding loan amount, which will in turn reduce your EMI. If you have a surplus amount, it is advisable to make prepayments as it will save you a lot of money in the long run.
“If you have surplus funds, consider partially prepaying your loan, which will reduce your EMI and keep your loan tenure unchanged,” Raj Khosla Founder and MD - MyMoneyMantra.com told TNIE.
If someone has taken a home loan of R50 lakh at an interest rate of 7% for 20 years, the EMI comes out to be R38,765. If the borrower makes a part-prepayment of R10 lakh, the remaining loan amount would be R40 lakh. The EMI for this reduced loan amount would be lower than your previous EMI.
“Assuming your previous EMI was R38,765, with the part-prepayment of R10 lakh, the new EMI would be approximately R35,989, which is lower than the previous EMI and helps you maintain parity with your earlier EMIs while keeping the loan tenure unchanged,” explained Khosla. Regularly paying a small amount over and above your monthly EMI helps you pay back your principal thereby reducing your effective loan tenure, says Gaurav Mohta, CMO, HomeFirst Finance.
“This also helps you create a cushion for such periods of rising interest rates by keeping your monthly outlay similar against a higher EMI, thereby matching your now revised loan tenure with the loan agreement. Prepayment this way, not only saves you the interest you would have paid on the total prepaid amount, but it also saves you the stress of rate revisions during this time,” he said.
Switch to loan with lower rate
When banks raise rates, scan the websites to find the bank with comparatively lower interest on home loans. Fierce competition has compelled banks to offer lower loans at lower rates to lure customers. Even a slightly lower interest will make a significant impact on your total outgo towards the total loan payment.
“The best way to keep EMIs at the same or lower them is to switch to a loan with a lower rate of interest. Here, it is important to note that even a slight decrease in the interest rate can result in a notable lowering of EMIs. For instance, switching your loan to an interest rate that is 0.5% lower than the existing one can lower your EMI by as much as 8-10%,” Atul Monga, Founder and CEO of Basic Home Loan told this newspaper.
Opt for a longer loan tenure
By extending the loan tenure, you can spread the amount you need to pay over a longer period, which will result in a lower EMI. However, this means you will end up paying more interest in the long run. “Extending your loan tenure can reduce the EMI amount considerably as the tenure is directly proportional to EMI. This can be a viable option for someone who is looking to reduce their EMIs. Whatever option you choose to pursue, it is important to weigh the pros and cons carefully before making any decision,” added Monga.
Negotiate with your lender
You can also negotiate with your lender and request them to offer you a lower interest rate. Lenders are often open to negotiations, especially if you have a good credit history and are a loyal customer.
Dealing with higher interest rates