Home loan buyers have borne the burden of expensive home loans either in the form of higher interest rates or extensions. For the last two years, home loans have become more expensive for new entrants and also for existing borrowers.
As the repo rate skyrocketed from 4% to 6.5% over the last 20 months, the debt burdens of home loan borrowers ballooned, as EMIs increased and loan tenures extended, sometimes well beyond retirement age. The BankBazaar Aspiration Index, an annual study that studies key aspirations of people, year-on-year, revealed that more than half of the survey’s respondents saw their interest rates rise by 1-3% and their EMIs go up by approximately Rs.2000-Rs.10,000.
“On average, borrowers who started their loans with an average interest rate of 7% have seen it go up to 9.5% following the rate hikes. EMIs, too, have gone up by Rs.158 per lakh, from ₹775 to ₹932 per lakh,” said Adhil Shetty.
What should existing borrowers do to combat the pressure of the rate hikes?
“To combat the pressure of the rate hikes, existing borrowers can explore switching to lower home loan rates and continue to prepay a part of the loan to reduce the burden,” said Adhil Shetty, CEO, of BankBazaar.com
The Reserve Bank of India’s Monetary Policy Committee (MPC) has decided, for the fifth time this year, to keep the key policy rate unchanged at 6.5 per cent. The last revision to the repo rate happened in February 2023, when it was increased to 6.5 per cent following a 0.25% basis point hike.
Advantages of prepaying home loan
As banks charge higher interest rates for home loans than what you may earn on most financial instruments it could make sense to prepay a home loan and save on interest rather than invest in fixed-income instruments which offer lower returns.
Disadvantages of prepaying home loan
You qualify for a tax deduction up to ₹2 Lakh per annum on home loan interest repayments. It helps you reduce taxes by around ₹40,000 and 60,000 per annum if you are in the higher income tax brackets of 20% and 30%. You may lose this tax benefit if you prepay the home loan.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 19 Dec 2023, 12:50 PM IST