Repo rate at an all-time high of 6.5%. Here’s how to make a home loan affordable with prepayments

Date : 14/02/2023
Read: 3 mins

Making home loans affordable through prepayment amidst rising repo rates

Repo rates are an important parameter when lenders determine their lending rates. The repo rate signifies the rate at which the RBI lends money to banks. If the repo rates rise, it becomes dearer for banks to borrow. As a result, banks often pass on the increased repo rates to their borrowers. They hike the loan interest rates making borrowers pay more.

Over the last few months, RBI has been hiking the repo rates to curb inflation. In the latest monetary review, the regulator has hiked the repo rates for the sixth time. The revised rate stands at 6.5%. This hike is expected to make home loans dearer. As such, borrowers can opt for prepayment to reduce their loan burden.

Let’s understand.

Home loans and repo rates

As mentioned earlier, hiked repo rates mean higher interest charges. As the repo rate is hiked again, lenders are also expected to increase their home loan lending rates.

Before the hike happened for the first time in May 2022, the home loan interest rates were around 6.7% per annum. Then, the rate hike began, and home loan rates started climbing. As of February 2023, the loan interest rates stood around 8.50% to 8.75% per annum. This fresh rate hike might increase the loan rates further.

How to reduce the home loan burden?

As home loan rates climb, it becomes dearer for borrowers to pay their outstanding debt. Loan interest rates affect the EMIs, and rising rates mean rising EMIs. This might put a strain on your finances and disrupt your budget.

As such, reducing the loan burden is important. One of the ways to do so is through prepayment.

Prepayment – the concept

Prepayment of a home loan means repaying the loan before the stipulated tenure. You can prepay fully or partially, depending on the funds at your disposal. Usually, partial prepayments are popular, wherein borrowers make a bulk payment towards their loan liability to reduce it. As the outstanding debt reduces, the loan EMIs also reduce.

With rising repo rates, experts suggest that prepayment can be a suitable choice. As you prepay a part of your loan burden, you can reduce your EMIs so that the rising interest rates do not strain your finances.

Tips for home loan prepayment

While prepayment is beneficial, here are some tips that would sweeten the deal further –

Prepay the loan in the earlier years of the repayment tenure. It is when the outstanding debt is the highest, and a slight interest rate increase would considerably increase the EMIs.
Use your debt-oriented savings, like money in the savings account or fixed deposit investments, to prepay the home loan. The returns earned from debt instruments are usually lower than the interest payable for the home loan. Thus, your savings would be better used to reduce the loan burden and save on the interest payable.
Do not sacrifice your goal-based investments for prepayment. This would hamper your goal planning and might prove bad later on.

While you cannot control the rising repo rates, you can definitely make your home loan more affordable through prepayment. So, understand what prepayment is all about and how it works. Prepay your loan to some extent so the repayment can be budgeted easily.