Most banks have raised their home loan interest rates after RBI raised its repo rate by 25 basis points two weeks ago.
The RBI raised the repo rate by 250 basis points between May 2022 and February 2023. The banks have transmitted almost all of the rate hikes or will do so soon.
It means that 15-year loans now charge approximately Rs. 80,000 in interest, up from about Rs. Rs. 62,000 in interest. The EMI per lakh has increased by 16%, increasing from Rs.899 to Rs.1044. In other words, your EMI would have increased from Rs. 44,941 at 7% to Rs. 52,211 at 9.5% if you had taken out a Rs. 50L loan for 15 years.
In case of existing borrowers, lenders typically increase the tenor of the loan instead of the EMI. For a 15-year outstanding loan, a 2.5% increase translates into an increase of 7 years and 6 months.
According to Adhil Shetty, BankBaazar.com, unless you have been diligently prepaying, the lender may not have enough room to extend the tenor alone. As a result, it is inevitable that the EMI will have increased. Adhil Shetty advises that the only alternative is to prepay aggressively.
Repaying slowly at 7% and investing in instruments that provide 10-12% returns is no longer an option. To minimize the impact of the hike, you need to create a prepayment plan that works for you and start prepaying your loan. “It’s not about liquidating all existing investments to close the loan, but about prepaying strategically.”
Prepaying 5% of the outstanding principal each year has the potential to reduce a 20-year loan to 13 years. Alternatively, you can pay an additional EMI every quarter or a little more than your regular EMI every month. This can be done based on your finances and liquidity.
You should consider refinancing your home loan only if you stand to gain a 50 to 100 basis points reduction from your current loan. As with applying for a new loan, refinancing your loan also involves all the typical expenses such as processing fees, MOD charges, legal fees, etc. When you transfer your loan, make sure you take these into account,” Shetty advises.
To find out how much you can save on interest when refinancing, use a refinance calculator. Include penalties, fees, and charges to get a realistic estimate. You can also negotiate with your lender to get a better rate.
If you switch the loan after five years or so, you will have already paid off most of the interest amount,” says Atul Monga, BASIC Home Loan’s co-founder and CEO.
A lender may charge anywhere from 50 to 200 basis points as a credit risk premium over the benchmark-linked rate, depending on your credit score.
If your credit score has improved over time, you may be able to refinance to a lower rate. This is particularly important if your home loan was your first loan.
Making a higher down payment is the best way to get a lower interest rate if you’re a new borrower. “Lenders may offer you lower interest rates if you don’t have too much surplus income but have an excellent CIBIL score,” says V Swaminathan, executive chairman, Andromeda Loans.
Your credit history indicates that you have a good history of repaying debts. If your credit score is poor or you have an unpredictable income, you are considered a risky borrower. If this is the case, you may have to turn to an NBFC rather than a bank for a home loan.
Currently, if your CIBIL score is above 800, you are eligible for a home loan with SBI at 9.15% interest. If your score is between 700-749, the interest rate is 9.35%. If your score is 55-649, the interest rate is 9.65%.