Home loan borrowers likely to feel the heat of higher interest rates as reserves bank of india (RBI) is widely expected to hike its key policy rate on September 30. If it does, it will be the fourth repo rate hike in this financial year.

To overcome rising inflation, India’s central bank has started raising interest rates from May 2022 after maintaining status quo on key rates for two years. The cumulative repo rate increase so far between May and September is 140 basis points. With another high repo rate hike knocking at the door, home loan borrowers may soon face higher interest rates than at present. Let us find out how home loan borrowers are likely to be impacted.

RBI MPC: RBI may increase the repo rate by up to 50 basis points
Most experts are anticipating a hike in the repo rate tomorrow. Adil Shetty, CEO, BankBazaar.com, said, “Given the dollar growth and resurgence in inflation, rate hikes are imminent. The hike will have a huge impact on borrowers,” said BankBazaar.com CEO Adil Shetty.

“The MPC is more confident about growth than inflation, with the central bank’s harsh policy bias to continue this week. We will revise our rate hike call for the upcoming meeting to 50 basis points from the earlier 35 basis points.” , taking the repo up to 5.9 per cent,” said Radhika Rao, executive director and senior economist at DBS Group Research.

“Inflation remains high around 7 per cent and is unlikely to come down anytime soon. That means given the rate hike. Quantity is what the market will be interested in. While 25-35 basis Points to rise indicated RBI is confident that the worst of inflation is over. Recent developments in the forex market to keep investor interest on track with other markets to stay on track with volumes higher by 50 bps may motivate,” Madan Sabnavis, Chief Economist, Bank Of Baroda,

How can home loan interest rates be affected?
All new floating-rate retail loans sanctioned by banks are usually linked to an external benchmark, which in most cases is the repo rate. Any change in the repo rate will affect the home loan interest rates. Any increase in the repo rate will lead to an increase in the EMI of these loans. However, along with other old home loans, home loans linked to MCLR, Base Rate and BPLR will also be impacted.

How much? home loan interest rate expect to rise
From May 2022, RBI has increased the repo rate by 140 basis points and home loan interest rates by an average of 75 basis points. Market observers said more than 50 per cent of the repo rate hike has been remitted.

According to various experts who spoke to ET Wealth Online, banks may increase their lending rates by 25 to 50 basis points if the RBI hikes the repo rate by 50 basis points on September 30.

“In the upcoming monetary policy meeting of the RBI, we expect a further 50 basis points hike in the economy taking into account retail inflation and Fed rate hike. Taking a cue from the previous transmission, we expect home loans to rise by another 50 basis points. Huh

However, not all borrowers will be affected equally in the near future. “The hike in home loan rates will be based on the decision of an individual bank to transmit the increase in the repo rate,” said Samantak Das, chief economist and head of research and REIS, JLL, Bharat.

As per the trends of the last four months, only half of the rate hike has been transferred to borrowers. “This year, every increase in the repo rate has resulted in a half increase in the MCLR of banks. For example, the MCLR of banks state Bank of India ,State Bank Of India) has increased by 70 bps in 2022 in response to an increase of 140 bps in the repo rate during the year till August 2022. A further 50 bps increase in the repo rate should lead to an increase of 25 basis points in the MCLR, taking the overall increase on account of the rate. An increase of 95 basis points, said Vivek Rathi, director, research, Knight Frank India.

EMI may increase in case of EBR linked home loans

Since there is an option to select from various benchmarks for linking EBR, the transmission will vary on the type of benchmark chosen by the lender. “Since each bank has its own (different) external benchmark rates, transmission rates will differ. Based on past trends, it is likely that at least 50 per cent of the repo rate hike will be transmitted. That banks may delay transmission keeping in view the high housing demand during the festive season,” Das said.

However, in case of EBR linked home loans, the hike will be tantamount to a hike in the repo rate if that is their benchmark.

“Home loans linked to repo rates will see the fastest transmission of increased policy rates. For new home loan borrowers, the transmission of enhanced policy rates will depend on the rate reset dates as decided by banks as per their guidelines. Existing home loan borrowers will be charged a higher rate from the interest reset dates fixed for them by banks,” Rathi said.

For example, for a Rs 30 lakh home loan from SBI with a tenure of 20 years at 8.35 per cent, an individual would have had to spend Rs 25,751 on EMI before the repo hike. Assuming that the RBI hikes the repo rate by 50 basis points on September 30, the interest rate on this home loan could go up to 8.85 per cent. In such a situation, his EMI can increase to Rs 26,703.

Long EMI tenure is no longer an option
As the interest rates rise for existing home loan borrowers, they can either increase the monthly EMI or extend the tenure of the loan. However, “we have reached a critical point for borrowers where a higher rate may no longer translate into a longer term,” explained Shetty. “EMI hike should start at some point. Lenders would like to do it in phases to maintain minimum default,” he said.

“Most banks are seeing an increase in tenure, but it seems to be reaching a threshold for a lot of customers. Larger banks do not see any option but to hike EMIs for a fair base of customers. Most banks has increased the loan maturity age by five years, there is no scope to extend it further,” said Raj Khosla, founder, MyMoneyMantra.

Das said, “With the hike in the policy rate, the home loan interest rate is moving towards 9 per cent and it is still below the 10 per cent benchmark which was prevalent 8-9 years back.”

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