The home loan borrowers have faced another shock when the RBI hiked its repo rate consecutively second time in last two months. The latest revision on repo rate is announced on 1st August in which an increase of 25 basis points on repo rate is announced. Last month, on the 6th day of June 2018, RBI has announced its first revised repo rate of 6.25% which was previously 6%. Now once again the repo rate has been hiked by 0.25% and the present RBI repo rate has increased to 6.50%. The
What Will Be The Impact Of Repo Rate Hike On Borrowers?
The borrowers are one who will ultimately be the sufferers of this rate hikes. The increase of 50 basis point resulted in an interest rate hike for all loans linked with MCLR. It means all loans which are at a floating interest rate will have to pay more in interest payment. All the home loans which are linked with MCLR will have to pay a hiked interest rate and this is going to drain a big chunk of money from their wallet. After the first announcement of repo rate hike SBI, PNB, ICICI Bank raised their lending rates up to 10 basis points or 0.10 percent effective from 1st June 2018.
The hiked interest rate will not have any immediate effect on the borrower. The lenders nowadays, don’t increase the EMI amount, instead increases the tenure. Because of this system, the borrower may not feel the impact at once but if calculate you will fund that this interest rate hike is making a big hole in your pocket.
How to Deal with Interest Rate Hike
The existing home loan borrowers have to pay a quite big amount because of the 0.50% hike in interest rate. But if you take some smart moves, you will be able to save a significant amount in loan repayment. Here are some ways to beat the interest rate hike.
Loan Refinancing can Help You to Find a better deal
Switching lender can help you in situations like the present. We know that the repo rate has been increased by 25 basis points but it doesn’t mean that all lenders will also increase the interest rate by 0.25% only. Some lenders may increase its MCLR by more than 0.25%. If your lender is also one of them then you can switch the lender for a better deal. The lender switching is called ‘home loan balance transfer’ in the technical terms. One can make a home loan balance transfer only after completion of 18 months of EMI payment. One must compare home loan interest rates with a number of lenders before switching the loan. A decrease of 1% or less in interest rate can also make you save a huge amount by the end of the tenure.
Increase EMI Not Tenure
This is the ground rule to bring down the housing loan interest payment in such scenarios. A bank credit interest rate is charged in a compound interest rate. This means a longer tenure loan will be costlier than a shorter tenure loan of the same amount. As mentioned above, the repo rate hike will not have an immediate effect on the EMI amount but the tenure will be stretched. In such case, if you want to minimize the interest payment, you can make an agreement with your lender to increase the EMI amount instead of increasing tenure. By increasing the EMI you can save a significant amount in interest payment.
Part-Payment Of The Loan Whenever Possible
The part payment is one of the most effective tools to bring the cost of borrowing down. It is advised by many financial experts that instead of investing your surplus money for a low return, you can better pay off your loan. The savings you make on interest payable will be more than the returns of your investments. A home prepayment has a manifold effect on the borrower. With a prepayment of the home loan, you can reduce your tenure. A reduced tenure will make you debt free much ahead of the predetermined time. A part payment gives you the best results when it is done at the starting of the tenure. But the thing to be remembered here is that a part payment does not make any change in interest rate but it brings the interest payment down by decreasing the tenure.
The increasing of repo rate has happened after a long stretch of 4 years. The inflation of money is the prime reason for increasing repo rate and it is quite certain that it would increase or decrease in the future too. What we the borrowers can only do is taking some small steps so that we can bring the cost of borrowing down.