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How Recent RBI Repo Rate Hike Impacts Home Loan Borrowers

Jun 28, 2018 | 2 years ago | Read Time: 2 minutes | By CA Sandeep Vinod Kanoi

Borrowers who were hoping for relief from high rates of interest would have to maintain patience. The apex bank of the country, RBI (Reserve Bank of India) hiked repo rate by 25 basis points. Now, the repo rate stands at 6.25 percent. Together with this, the reserve repo rate is hiked to 6 percent. Before getting into the outcome of this increase, it is important to understand repo rate and how it’s implications on the banking system.

What is Repo Rate?

In simple terms, repo or repurchase rate is a rate at which Reserve Bank of India (RBI) lends funds to a commercial bank. Any increase in this rate would imply that the apex bank would be charging higher interest rates for the money which it lends to the commercial banks. The commercial bank, subsequently, would charge it’s more to its borrowers.

Impact on home loan borrowers

Even though the hikes in MCLR (marginal cost of funds-based lending rates), most of the cases are yet to convert into the actual hike in lending rates, however, it seems imminent. Hence, both existing and potential home loan borrowers should be prepared for shelling out more money.

With the rise in repo rate, the EMI outflow of a home loan borrower is likely to get impacted. For instance, a home loan borrower with INR 20 lakh home loan with an interest rate of 8.4% implies that the present EMI is INR 1.68 lakh. However, if the banks hike their rate of interest by 25 bps, the EMI would go up by INR 5,000 to INR 1.73 lakh. Bigger the loan bigger would be the impact.

Borrowers must pay heed to the type of loan which they take. If you’re looking to purchase a house property with the help of a home loan, one would have to choose a Floating Rate or Fixed Rate of interest. Fixed rate loans might have a fixed rate for a part or whole of the loan tenure. In case it is part-fixed, loan switches to the floating rate after a period. In case of floating rate loan, the interest rate varies with changes in the market rates.

What can a home loan borrower do?

Ideally, as a home loan borrower, you must wait to see in case your bank hikes the interest rates. In case your bank hikes the interest rates are considerable, then you could consider transferring the balance to another bank with lower interest.

The other way to protect yourself from a hike in the repo rate is by doing a pre-payment which would lower the total interest outgo. This is a good option for those home loan borrowers who are at the beginning of the loan tenure. One might also try switching to longer reset period around two years assuming that the MCLR is the same for that tenure. It would give enough time for rates to get stabilized. At the same time, one could also increase his savings to pre-pay his loan so that interest outgo isn’t as high.

However, if you’re nearing your loan tenure, it is advisable to simply maintain the loan until the end of its maturity and to collect useful tax deductions.

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