 "RBI repo rate hike: Should you pay higher EMIs or increase tenure to tackle increasing loan rates?")
The repo rate was hiked by the Reserve Bank of India (RBI) on 7 December by 35 points to 6.25 percent. After the rise in repo rate, the cost of loan for both existing and new home loan borrowers will increase by 0.35 percent.
The central bank has been raising the repo rate since May to tackle inflation. This in turn is causing the home loan rates to go up. Your Equated Monthly Instalment (EMI) will increase with the hike in home loan rate. This leads us to wonder whether we should increase the tenure of our home loan or pay a higher EMI to tackle the rising interest rate.
What to do about the dilemma of higher EMIs vs longer loan tenure?
There are certain measures that you can take in order to tackle this hike in loan rates. According to Adhil Shetty, CEO of BankBazaar.com, you can shorten your loan tenure by prepaying your home loan as and when the funds are available with you. He stated that if one pays 5 percent of the loan balance each year, then he/she will be able to pay off a 20-year loan in 12 years.
He further advised that the prepayment of one additional EMI each year can close an individual’s loan in 17 years. Shetty went on to add that an increase in EMI by 5 percent per year can finish the loan before 13 years. He further said that borrowers can close their loan in around 10 years by increasing their EMI by 10 percent every year.
If you do not wish to raise the tenure of the loan, you can increase the EMI. But make sure that it does not affect your cash flow. However, the default option of most of the banks is to raise the loan’s tenure.
Quick Reads
View AllAccording to Shetty, one can also try to refinance their home loan in case the rate is not in sync with the market or the credit profile of an individual. However, it should be noted that you may be charged legal and processing fees.
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