BackHome loan EMI: Money task for existing borrowers after RBI rate hike
Home loan EMI: Banks reset MCLR linked long term loans in 6 months and repo rate linked loans in three months
PremiumHome loan EMI: The Reserve Bank of India (RBI) has raised key interest rate by 50 bps in its latest monetary policy meeting bringing repo rate at pre-Covid levels of 5.40 per cent. However, it would be interesting to know that the central bank of India has raised repo rate by 1.40 (0.50 + 0.40 + 0.50) per cent in last two months. This is going to impact fresh home loan borrowers as as retail banks are expected to increase home loan interest rates after RBI rate hike decision. But, this is going to impact the existing home loan borrowers too,
According to tax and investment experts, home loan lenders reset MCLR-linked long term loans in 6 months and repo rate linked long term loans in three months. They have their own cycle of loan rest period and hence it may happen that the recent 1.4 per cent interest rate hike may get added in one's home loan EMI in upcoming loan reset cycle. They said that in case of home loan interest rate hike, generally banks don't increase monthly EMI but they increase the tenure of repayment as it won't require fresh loan agreement with the home loan borrower. However, it is better for the borrower to get its home loan EMI raised if he or she is able to bear the burnt of monthly EMI rise.
Speaking on the impact of this RBI interest rate hike on existing home loan borrowers, Pankaj Mathpal, MD & CEO at Optima Money Mangers said, "Home loan and other long term loans are either MCLR linked or repo rate linked these days. In such long term loans, banks reset MCLR linked home loans after six months and repo rate linked home loans after three months. Banks have their own cycle of loan reset period and hence it may happen that some home loan borrowers interest rate goes to the tune of 1.40 per cent up in upcoming loan reset cycle."
Pankaj Mathpal of Optima Money Managers said that banks don't increase monthly EMI but raise tenure of repayment. Though it is always advisable to repay the loan as soon as possible. So, a home loan borrower is advised to visit one's bank branch or or consult its relationship manger and ask about the impact on one's monthly home loan EMI post-interest rate hike. If he or she has the capacity to repay one's home loan by increasing the monthly EMI instead of increasing the repayment tenure, one should opt the rise in monthly EMI.
On why banks raise loan repayment tenure instead of monthly EMI, SEBI registered tax and investment expert Jitendra Solanki said, "For increasing the loan repayment tenure, banks don't need any agreement with the customer whereas for increasing the monthly EMI, they need to go for fresh loan agreement with the customer. Hence, they prefer to the convenient option and raise the tenure. But, borrowers are advised to contact the bank and choose hi8gher monthly EMI if they are able to bear the burnt of higher home loan EMI."
Solanki said that one can also choose the higher amount to be paid after the rise in interest rates by preferring to loan pre-payment option. One can pre-pay the higher amount payable after the home loan interest rate hike without disturbing the monthly EMI and loan repayment tenure. However, this option is preferable only when the borrower has enough savings to meet that.
Pankaj Mathpal of Optima Money Mangers said that rise in home loan interest rate will hit fresh borrowers home loan eligibility as well because due to the higher home loan interest rate, home loan amount will be lower in comparison to current scenario.
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