- Since May 2022, the EMI per lakh has gone up from ₹899 to ₹1,044.
- Consider refinancing only if you stand to gain at least 50 to 100 bps reduction on your current loan.
- You may choose to prepay your loan or pay extra EMI every quarter or little over your regular EMI every month.
Between May 2022 and February 2023, the RBI has raised the repo rate by 250 bps. The banks have transmitted almost all the rate hikes, or are in the process of doing so in the next few weeks.
This means the interest per lakh on a 15-year loan has gone up from approximately ₹62,000 to approximately ₹87,000. The EMI per lakh has gone up by 16%, from ₹899 to ₹1044. So, for a ₹50L loan for 15 years, your EMI would have gone up from ₹44,941 at 7% to ₹52,211 at an interest rate of 9.5%.
Prepaying your
“So, unless you have been pre-paying diligently, and probably despite that, the lender may not have enough room to extend the tenor alone. So, it is inevitable that the EMI would have gone up. In this situation, the only alternative is to pre-pay aggressively,” says Adhil Shetty, BankBaazar.com.
“The time to repay slowly at 7% and invest in instruments providing 10-12% returns is over. You need to make a prepayment plan that works for you and start prepaying your loan. The idea isn’t to liquidate all existing investments to close the loan, but to prepay strategically to minimize the impact of the hike,” says Shetty.
He suggests choosing to prepay 5% of your outstanding principal each year. This has the potential to reduce a 20-year loan to 13 years. Alternatively, you can pay an extra EMI every quarter or little over your regular EMI every month. You can decide how to do this based on your finances and liquidity.
Consider refinancing your home loan: “As a thumb rule, consider refinancing only if you stand to gain at least 50 to 100 bps reduction on your current loan. Refinancing your loan is similar to applying for a new loan and has all the incumbent expenses such as processing fees, MOD charges, legal fees, etc. So make sure you account for these expenses when you transfer your loan,” says Shetty.
Use a home loan refinance calculator to calculate how much you would save on interest when you switch. Factor in the penalties, fees, and charges to get a realistic estimate. Also negotiate with your lender for better rates before opting for refinancing.
“One must switch the loan early on during the tenure. If you do so after 5 years or so, you would have already paid off most of the interest amount,” says Atul Monga, co-founder and CEO, BASIC Home Loan.
The minimum rate at which you can get a loan depends on your credit score. Lenders charge anywhere between 50 to 200 bps as credit risk premium over the benchmark-linked rate.
“So if your credit score has improved over time, you may be able to refinance to get a lower rate of interest. This is particularly significant if you didn’t have a credit score and your home loan was your first loan,” adds Shetty.
Ways to lower your interest rates: “If you are a new borrower, the best way to avail of lower interest rates is to make a higher down payment. If you do not have too much of a surplus income but have an excellent CIBIL score, lenders may offer you lower interest rates,” says V Swaminathan, executive chairman, Andromeda Loans.
This is because your credit history reflects that you have a good record of paying back debts. However, if you have poor credit scores or an unsteady source of income, you are viewed as an untrustworthy borrower. In such a situation you may have to take a home loan from a NBFC instead of a bank.
Currently, if your CIBIL score is above 800, you are eligible to get a home loan at 9.15% interest from SBI. However, if your credit score is between 700-749, the interest rate is 9.35%. For an even lower credit score of 55-649, the interest rate is 9.65%.
If you are planning to borrow in the coming year, take this time to build up a solid credit score and history to get a loan at lower interest rates.
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