How will the RBI's repo rate hike impact your home loan?

The RBI hiked repo rate by 40 bps. This hike will translate into higher equated monthly instalments, or EMIs, on new home loans.
 
For existing borrowers, the tenure will increase, which will translate into a higher interest burden. But, if the limit on tenure — usually retirement age for salaried employees and 65 years for the self-employed — gets breached, their EMI could also rise.
 
Interest rates are headed upward.
Anarock Group Chairman Anuj Puri has said that the RBI’s rate hike signals an imminent end to the all-time low interest rate regime, which has been one of the major drivers of home sales across the country since the pandemic began.

Experts believe rates will continue to harden for some time, given the high and persistent nature of inflation.

Existing borrowers should go in for planned pre-payments.
According to BankBazaar CEO Adhil Shetty, existing borrowers should use any windfall or savings to prepay loans. Borrowers should aim to prepay 5 per cent of the loan balance every 12 months, he says. By prepaying at this optimal rate, one could reduce the loan tenure from 20 years to 12.

Borrowers still on a loan linked to the marginal cost of funds-based lending rate, or MCLR, should shift to a repo rate-linked loan after careful calculation.

Shetty says unless the difference is more than 50 basis points, you could stay put in certain circumstances.

EMIs on repo rate-linked loans are expected to be revised from next month.
An MCLR-linked loan may reset after several months, assuming your loan is linked to a 12-month MCLR. Hence, do a detailed analysis of costs before shifting.

Home loan balance transfer can also reduce your interest burden.
Aditya Mishra, director - home loan desk at 4B Networks, advices the evaluation regarding whether to shift loan must be done every quarter. If you have more than 15 years of tenure left, switch if there is a difference of just 25 bps between your existing rate and the best rate you can get. If 5-10 years are left, switch if there is a difference of around 70 bps. And if 10-15 years are left, the difference must be 50 bps.
 
In a rising rate scenario, home finance companies whose loan rates are not linked to an external benchmark could hike their rates by more than the quantum of the repo rate hike.
MyLoanCare founder and CEO Gaurav Gupta believes new borrowers will be better off going for a repo rate-linked loan rather than one benchmarked to the prime lending rate.
Banks, whose rates are linked to an external benchmark, could possibly hike the spread on their loans for new borrowers.
 
Sanjay Kumar Singh of Business Standard says HFC loan rates could climb at faster pace than that at which repo rate goes up
and borrowers should stick to repo rate-linked loan.
 
According to experts, comparing rates become crucial in a rising rate scenario. They suggest, one should budget for higher rates in the future. And avoid over-leveraging in these circumstances. A rate that appears inexpensive today may not remain so in the future. Higher interest rates will reduce the loan amount new borrowers are eligible for. Get ready to arrange a higher down payment. Finally, with prepayment becoming crucial, go with a lender that offers easier terms and conditions for prepayment.