For existing floating rate home loans linked to the repo rate, higher interest rates will be charged based on the interest reset dates
Home loans and other retail loans will get more expensive as the Reserve Bank of India raised the repo rate by 50 basis points (bps) on Wednesday, the second hike in two months, taking it to a total hike of 90 bps. Typically, loans linked to repo rates have faster transmission of rate hikes, which is quicker for fresh floating rate loans.
For existing floating rate loans linked to the repo rate, higher rates will be charged based on the borrowers’ interest reset dates. Till then, they would continue to pay their existing interest rates.
Impact on home loans
A 50-bps increase in the repo rate will raise the EMI on a Rs 30-lakh home loan of 20-year tenure by Rs 910. Similarly, for a Rs 50-lakh loan for the same tenure, the EMI will increase by Rs 1,517 and for a Rs 1-crore loan, the increase will be Rs 3,035.
With the total 90 bps increase in repo rate, the EMI on a Rs 30-lakh home loan will increase by Rs 1,627, by Rs 2,711 for a Rs 50-lakh loan and by Rs 5,422 for a Rs 1-crore loan, all for a 20-year tenure. If borrowers choose not to increase the EMI, then the tenure of the loan can increase up to 46 months.
Car loans, too, will become more expensive for new borrowers. A 50-bps hike in repo rate will raise the EMI for a Rs 10-lakh car loan of seven years by Rs 347. However, those who have taken a fixed interest rate loan will be spared.
Any change in the external benchmark-based lending rate such as a repo rate will lead to a faster transmission as compared with marginal cost of funds-based lending rate where the rates are reviewed every quarter. If a borrower is on a floating rate loan, the EMI may be fixed for the tenure, but the tenure itself will increase with the hike in interest rates.
Home loan interest rates which had bottomed out at around 6.5% in April will now be inching towards 7.5% in June. Adhil Shetty, CEO, BankBazaar.com, says the key is to pay off the loan in the intended timeframe. “Use pre-payment methods such as EMI step-ups or lump-sum payments to control your interest burden,” he says.
Chaitali Dutta, founder, AZUKE Personal Finance Advisory, says borrowings for discretionary spendings may see a nosedive and retail borrowings are expected to be impacted with only the end-user going in for home loans. “To avoid paying additional interest throughout the tenure of the loan, and if the cash flow allows, it would be better to increase the EMI as compared to increasing the tenure of the loan,” she says.
Home loan borrowers, both fresh and existing ones, having restricted liquidity can opt for the home saver option in which an overdraft account is opened where a borrower can park his surpluses and withdraw from it as per his financial requirements. The interest component of the loan is calculated after deducting the surpluses parked in the account from the outstanding home loan amount.
Naveen Kukreja, CEO & co-founder, Paisabazaar.com, says many existing home loan borrowers may have witnessed substantial improvement in their credit profile due to the improvements in their credit score, occupation or income profile after availing home loan. “Such borrowers should explore the possibility of interest cost savings through home loan balance transfer. Their improved credit profile may make them eligible for home loans at much lower rates from other lenders,” he says.