Reserve Bank of India (RBI) recently increased the level of repo by 50 basis points to tame the increase in inflation in this country. With the latest increase, the repo level returns to the pre-pandemic level of 5.40 percent. This has become an increase in the third repo tariff in a row by the Central Bank of India since May-revised the 40-basis point cycle in May, followed by an increase in the 50-Basis Points loan level in June. The repo level has been raised by 140 basis points between May and August.
Repo tariffs are the level where the Bank of India reserve lent money to banks and other financial institutions. It must be noted that floating level retail loans approved by the bank after October 1, 2019 are related to external benchmarks. For most banks, this external benchmark is a repo level. Increasing the level of repo will shoot housing loan rates and private loans connected to repo rates. Home loans related to marginal costs from the Fund -Based Loan (MCLR) level and basic tariffs will also be expensive because bank loan costs will surge after an increase in repo tariffs.
“Increasing the level of repo by RBI in turn will increase interest rates for different products such as home loans, etc. This in turn increases the load for the borrower. Therefore, the borrower will feel a pinch in their pockets, “said Sujay Das, Head of Risk Officer, Freo. Loan interest rates increase; The borrower feels an emergency Home loans and other retail loans related to repo tariffs will witness the fastest transmission from the increase in the policy interest rate. The transmission will be faster for fresh -floating retail loans, “said Naveen Kukreja – CEO and Co -Founder, Paisabazaar.
The exact date of transmission of the increasing level of policy for fresh house loans and other retail loan borrowers will depend on the tariff reset date set by the bank according to their guidelines. For existing floating level loans related to the repo level, the borrower will be charged a higher rate than their interest reset date, added Kukreja.
Some banks including HDFC Bank, ICICI Bank, Punjab National Bank (PNB), Bank of Baroda (BOB), Canara Bank has raised their loan rates, following the RBI announcement on August 5.
What should borrowers do home loans now?
To reduce the impact of interest rates, borrowers of existing house loans can be either equivalent monthly installments (EMI) or their loan period. “Note that choosing a tenure increase option will produce a higher interest cost than the EMI increase option,” Kukreja added.
For example, you have taken a house loan of RS 30 Lakh with an interest of 7.55 percent per year, with a term of 25 years. EMI is in RS 22,267. After the latest interest rate increase by the Reserve Bank of India, the revised interest was 8.05 percent. At a new level, you must issue RS 23.254 for EMI, remembering that your EMI will surge in RS 987 per month. The interest expense will increase by 2,95 LAKH RS for all term.
Now, most banks prefer to extend the loan period while keeping Emis permanent. So, if the loan period is extended 36 months, the interest expense will jump sharply. In the same example, if the interest rate remains 7.55 percent and the prepaid period increases 3 years, the interest expense will be climbed by RS 5.39 LAKH.
To save the increase in interest costs, borrowers can consider prepaid options. “Borrowers of existing house loans with adequate surplus must pay in front of their home loans and preferred to choose the option to reduce term of office to produce higher savings in interest costs,” suggested Kukreja. Regular payments will significantly reduce the amount of loan that has not been paid.
The Home Saver option is here for you Borrowers who have limited liquidity can choose the Home Saver option. Under this facility, the cuping account is opened in the form of a current account or savings where the borrower can park the surplus and withdraw from it according to their financial needs. The house loan interest component is calculated after a reduced a surplus parked in a savings account/currently from an extraordinary number of home loans.
Transfer Balance: Should you do it?
Another option can transfer balances to lenders who offer competitive interest rates. With simple words, qualified borrowers can move their home loans to banks that offer lower interest rates than existing lenders. “There are existing housing loan borrowers who have witnessed substantial improvements in their credit profiles that utilize their home loans must explore the possibility of savings in interest costs through the transfer of home loan balances,” Kukreja advised. Remember that there are additional costs involved in the process such as processing or penalties to transfer loan balances from one lender to another. So, the borrower needs to calculate the advantages and disadvantages and savings before selecting the balance transfer.