- Date : 10/06/2022
- Read: 6 mins
Be aware of the options available to offset the current RBI REPO rate hike by cushioning the impact of high EMIs or by increasing the term.
RBI announced the REPO rate hike by 50 basis points on 8th June 2022 to 4.90% with the objective to tighten liquidity in the market. The reasons were manifold. During the pandemic, people could not afford to pay their EMIs for their loans. As a result, the RBI lowered the interest rate to make it more manageable for the middle class to pay and reduced the EMI rate. For close to two years, RBI withstood the pressures on the economy due to a lack of business during the pandemic. Moratoriums were also announced on EMIs so that people could make deferred payments.
But the pandemic soon eased, lockdowns relaxed, and businesses reopened gradually. In May 2022, RBI hiked the REPO rate to 4.40% from 4.00%, and then again on 8th June 2022, the REPO rate was increased to 4.90%. This was mainly to curtail high inflation where CPI (Consumer Purchase Index) was hovering at 7.79%, which is high above RBI’s comfort level. Also, the cost of fuel escalated to beyond imaginable levels due to the war between Russia and Ukraine. Prices of commodities too in the global markets reached record highs. As the pandemic eased a bit, the RBI tried to remove liquidity from the market. With the REPO rate being increased to 90 basis points in a period of 2 months, it is certainly going to affect EMIs. As per reports, the hike of 90 basis points has increased the interest rate to 8% from 7.1%, keeping all other factors constant. So, on a loan of 35 lakhs, the interest @7.1%, the EMI was 40,818/-. Now at 8%, the EMI has been revised to 42,465/-. The monthly hike in EMI shoots up by Rs. 1,647/-
Also Read: Russia-Ukraine war impact on inflation
On receiving the home loan interest rates news, those affected by the impact of the REPO rate hike, with their EMIs going up by a few notches, can start by taking some logical steps to cushion the impact.
- Increase the duration of the loan repayment.
- Make partial lump-sum pre-payments towards the loan.
- Switch to another bank or loan transfer.
- Re-structure your loan.
If necessary, you can take the steps above by talking to your bank's relationship manager or branch manager.
Also Read: Borrowers Rights after securing a loan.
Increase the Duration of the Loan Re-payment
Request your bank to increase the duration of the tenure of repayment of the loan, rather than increase the EMI. Most banks allow it. However, it is important to note that the duration doesn’t go beyond your retirement. For those who are self-employed, the bank may not allow extending the re-payment beyond 65 years of the borrower.
It is estimated that on a 1 crore loan, where the tenure is at 20 years and where the total increase in EMI after the REPO rate stands at 4.90%, the interest rate will be increased to 8% and the EMI will be at Rs. 80,559. The EMI would be increased by a total of Rs.5,500 per month.
Make Partial Lump-sum Pre-payments Towards the Loan
When it is that time of the year when bonuses and hikes are received, just make sure some amount of that bonus is stored away to make pre-payments. If a lump sum amount could be paid towards the principal and the tenure is reduced, it would help save so many additional EMIs for the latter years. So, if there is a loan of 1 crore, then it is advised that 5 lakhs be allocated for pre-payment each year. That way, the tenure would be reduced from 20 years to say 12 years. The faster you become loan-free, the better it is for you.
Read Also: Why it makes sense to increase EMI or make partial pre-payments
Switch to another Bank or Loan Transfer
Banks give this option to customers as mandated by the RBI, that India being an open market, people can transfer their loans to their preferred bank. If you are bitten by the REPO rate hike and search out a bank that has relatively lower interest rates compared to yours', feel free to transfer the loan. Most banks offer home loans directly linked to the REPO rate, which will automatically reset your interest rates and increase savings. All this can be done with minimum documentation. You can continue your tenure with the transfer. That way you save on finishing the loan within the stipulated time of the tenure. You can also reduce the tenure and settle the payment quicker and save time and costs. You can also extend the tenure and reduce the EMIs if you want a lower monthly pay-out due to the current hike by RBI. Similarly, you can also reduce the EMI and increase the tenure. This is provided if your loan period is within the ambit of your retirement.
However, when there are volatile times like now, where the REPO rate is being tinkered with by RBI banks discourage switchovers and ask you to stay on for a minimum period like 12 or 15 months. This is done as they want to see your ability to pay.
Select a Home Loan Savings Account
Another method of reducing the EMI is by going for a home-loan savings account with your existing home-loan bank. Due to this, the bank can allocate an overdraft facility through your savings account. If you have some extra funds, then park them in the home-loan savings account and pay interest only on the balance amount. For instance, if you have extra funds of 5 lakhs, and you deposit it in your home-loan savings account, and the loan amount is 40 lakhs, then the bank would charge you interest for 35 lakhs. This way, you can get the benefit of the overdraft, and also you have access to your additional fund, which you can withdraw at any time, especially in emergencies.
A point you need to note here, though, is what would be the interest charges for an overdraft facility. Some banks charge, but many do not. The charges are a maximum of 0.5%.
Choosing a home-loan savings account can buffer rate hikes, but there are instances where banks have refused to switch, doubting repayment abilities.
Read Also: All about car loans.
Reorganise Your Loan
Bankers also advise that the best way forward is if your employer is unable to pay your salary just like during Covid-19, then request your bank to reorganise your loan. This is because the REPO hike would increase the EMI and you don’t have the ability to take on that additional burden.
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The REPO rate hike can increase further if the RBI wishes to bring down inflation and decrease liquidity in the market. Therefore, instead of changing banks, it would be better to divert savings into home loans and reduce the tenure and be debt-free.