Repo rate increased: With EMIs set to go up, is it wise to increase your tenure

New Delhi, May 04: With the Reserve Bank of India (RBI) increasing the repo rate by 40 basis points due to high inflation levels, the EMIs of loan holders is set to increase.

In the case of home loans the impact would be higher. Home loans are on a floating basis where any such hike is passed on to the borrower.

All floating rate home loans taken after October 1 2019 are linked to an external benchmark as per the mandate of the RBI. Since most banks have selected the repo rate as the external benchmark, a hike in repo rate will most likely mean an increase in the interest rate for loans.

Moreover banks are mandated to revise their external benchmark based lending interest rates once in three months to bring them in line with the external benchmark they are linked to.

When the interest rates go up, customers tend to increase their tenure rather than increasing the EMI amount. However this is not economical for the borrower especially in the long run.

There can be a scenario where a lender will not allow the consumer to increase the tenure of the loan and this happens when the borrower is over 60 years old. In such a case, the lender increases the EMI and keeps the tenure unchanged.

Since the repo rate hike is not substantial, the loner you keep your tenure, the higher the amount of interest you end up paying is higher. If you can afford a higher EMI then it would help keep the interest cost lower and you can close your loan sooner.

If your loan is over 5 years old, then it would make sense for you to check the interest rate regime under which your loan was sanctioned. In case you have not shifted your loan to an external benchmark linked home loan, then it is likely you may end up paying a much higher interest rate that what the banks on the new external benchmark charge.

If you are paying a higher rate of internet, you could ask your existing lender to switch your loan to a loan linked to external benchmark rate for which you may have to pay a fee to switch.

In case you bank does not offer this facility, then consider switching your loan to a new lender. If you are on a floating rate of interest then there is no penalty to switch to a new lender.

How will EMI's increase

If your loan amount is Rs 30,00,000 and the tenure is 20 years, then it would increase from the existing 6.8 per cent to 7.2 per cent.

The EMI for your 20 year loan of Rs 30,00,000 will increase from 22,900 to 23,620.
This means the EMIs would go up by Rs 720.