How to Minimize the Effects of a Repo Rate Increase on Your Home Loan?

The RBI raised the repo rate by 40 bps to 4.40 percent. This has caused fear among homebuyers and loan borrowers, as before. If you pay attention to a few issues and act quickly, housing and credit experts say the hike won't have a huge financial impact.

These steps can help you avoid a significant effect of the Repo Rate Hike on your mortgage.

Check whether your mortgage has a fixed or variable interest rate.

If you have a variable interest rate, when does it reset?

Unlike fixed interest rates, which do not vary under any circumstances, floating interest rates alter on the reset date based on market conditions. "For example, if you obtained a house loan in July 2019 at a rate of 6.70 percent, and the RBI raises the repo rate by 40 basis points in March 2020, and your reset date is June 15 of each year, you would pay an interest rate of 7.10 percent.

Subodh R of Loan Planet explains that in this case, the higher interest rate of 7.10 percent would not take effect until June 15, 2020, providing you time to account for the increased EMI payment and make the required financial adjustments.

Consequences of the latest rate increase

"As the repo rate increases, mortgage interest rates climb automatically." However, since a house loan is a long-term loan, it is anticipated that the interest rates would change at regular intervals. However, this would only effect individuals with a variable interest rate; if your interest rate is set, these changes would not influence your EMI payments. However, if you are wanting to purchase a property for your own use, this rate is still favourable. In fact, mortgage interest rates have reached 10 to 12 percent less often than they did a decade ago. Currently, interest rates are at their lowest levels, therefore a modest rise in rates will not affect the demand for house loans. Additionally, house loan borrowers are eligible for tax benefits on the repayment of principle and interest. This decreases the effective interest rate on house loans, according to a Mumbai home loan expert.

Will your EMI payments rise?

As per Shantanu Manjrekar, a leading home loan expert, a borrower has two alternatives to restructure this higher payback cost when the interest rate increases: either raise the EMI amount or extend the loan term. In most circumstances, if one does not expressly select for EMI amount revision, the lender lengthens the loan tenure without their knowledge. Any increase in the loan's duration will result in an increase in total interest paid.

Consider a mortgage loan with a term of 20 years and an existing interest rate of 6.75 percent in order to analyse the rate adjustment. Assuming a 40 basis point rise in the repo rate, the current interest rate is 7.15%.

By absorbing the monthly rate increase and maintaining the same loan term, you can save a significant amount for yourself.

Pay attention to the SPREAD

Typically, home loan rates related to the repo rate consist of the repo rate plus the spread. A spread is the rate that a borrower pays over the repo rate, which is determined by the borrower's particular lender based on variables such as loan amount, credit score, loan length, loan type, etc. For example, if your lender applies a one-percent spread and a six-percent interest rate, your total interest rate is seven percent. In many instances, lenders do not immediately boost the spread rate since it produces a precipitous decline in demand for house loans, thereby impacting their home loan disbursals. 

Real estate prices are on the move northwards

As a result of the increase in repo rates, the interest rate at which commercial banks lend to builders also rises, influencing the ultimate selling price. On the other hand, one must realise that the RBI raises the repo rate to manage market liquidity and combat inflation. The industry source says, "Buyers will feel the squeeze for a time since building prices are on the rise due to rising expenses of raw materials and now loan rates."