Existing borrowers, who have taken a home loan on a floating rate basis, will see their EMIs increase further. Most new borrowers, whether servicing fixed or floating rate loans, will need to pay higher EMIs for their loans as and when banks pass the latest policy rate hike.
impact on borrowers
RBI had already raised the repo rate from 4% to 5.4% within a short span of 93 days till the last meeting of monetary policy on August 5. After the recent hike, the repo rate has been hiked by a total of 1.9% (50bps +140 bps) from May this year. Most of the lenders have already passed on the higher rate to the borrowers, especially those who have EBR linked home loan. However, for other borrowers, who have loans linked to the old rate regime like MCLR, Base Rate or BPLR, they will increase gradually. Rate of interest In the near future.
“The latest hike in repo rates will make funds costlier for existing and new borrowers. For existing borrowers, all home, car, personal and education loans at floating rates will become more expensive. New borrowers will have to take loans at higher rates. Compared to last week,” says Adil Shetty, CEO, Bankbazaar.com.
While repo rate linked EBR loans will increase by 50 bps, however, the increase will be less for other loans linked to MCLR, Base rate or BPLR. “From April 2022, RBI increased the repo rate by 140 bps, while home loan Rates have increased by an average of 80 bps – over 50% have been transmitted so far. Taking cues from the previous transmission, we expect home loan interest rates to rise in the range of 25-30 bps,” says Samantak Das, chief economist, and head of research and REIS, India, JLL.
“The low interest rate regime is over. We are now moving towards higher cost of borrowing tenure. The fresh hike in repo rate is likely to have a market-wide impact on existing EMIs as well as new borrowers. MyMoneyMantra. “Loans are set to get costlier in a matter of months as banks have made fresh hikes after the respective reset cycles,” says Raj Khosla, founder and MD..com.
New hikes on the part of lenders may be delayed keeping in view the festive season. “There is a possibility that banks may also delay the transmission in view of the increasing demand for homes during the festive season,” says Das.
how much your EMI will increase
Due to increase in these rates by RBI, banks, NBFCs and housing finance companies are increasing their lending rates accordingly, which means your EMI has increased accordingly and with the recent hike in repo rate, it will increase further. Let us understand the impact of the latest 50 bps interest rate hike on various types of loans.
If you have Rs 30 lakh outstanding with a balance tenor of 20 years at 8.5% p.a. interest, your EMI will increase by Rs 957 from Rs 26,035 to Rs 26,992. For every Rs lakh loan, you may have to pay an additional Rs 31.90 towards EMI for the same tenure and increase in interest rates.
Similarly for an auto loan of Rs 8 lakh for a tenure of 7 years, if the interest rate increases from 11.00% to 11.5%, a corresponding increase in EMI will be Rs 211 from Rs 13,698 to Rs 13,909.
On a personal loan of Rs 5 lakh with a tenure of 5 years, if the interest rate increases from 15% to 15.5 per cent, your EMI will increase by Rs 132 to Rs 11,895 from Rs 12,027.
Will rates continue to rise in the future?
Even though rates have been hiked thrice, the end is not in sight. The primary factor driving these rate hikes is inflation. Retail inflation in India, which is measured by the CPI, is still at a high as the CPI for the month of August stood at 7%.
“With inflation likely to be broadly in line with RBI’s projections, this week’s hike of 50 bps will turn the ex-post forward real repo rate positive, albeit below the RBI’s projected real neutral rate of 0.8-1% At this point, we still feel that the RBI will not be too restrictive and the terminal rate may be close to the projected real rates, meaning there will be no further hikes by more than 100 bps, including today’s decision. The extent of the disruption will remain important ahead of the RBI’s response function, says Madhavi Arora, principal economist at Emkay Global Financial Services.
Unless inflation falls within RBI’s comfort zone, which is 2-6%, it will be forced to exercise the interest rate hike option among other inflation control options. “The withdrawal of the accommodative stance is an indication that the bigger challenge for the RBI is to control inflation and keep it within tolerable limits,” says Rahul Shrestha, vice president, Avenor Capital.
The rate hike cycle is expected to continue until there is a lasting sign of moderation in global inflation. “Will there be further hike in interest rates by RBI? Certainty exists, but the quantum of hike remains unpredictable and will be based on inflation print in the coming months. RBI’s MPC will have two more meetings before the end of the current financial year. December 5 – 7, 2022, and February 6 – 8, 2023. A similar situation cannot be ruled out in India, with the US, UK and many other countries in control of inflationary pressures, albeit at a lower rate. But,” says Tejas Khode, CEO and co-founder of FYERS.
Here’s a look at what home loan borrowers should do now.
Avoid tenure extension if you can afford higher EMI
Whenever interest rates rise, lenders prefer to extend the tenure of the loan instead of EMI which is easier to operate with their existing home loan borrower as they do not need to change the EMI mandate. However, it is not in the best interest of the borrower. Any extension in EMI adds up to your total interest payable amount. You can easily save it by asking your lender to keep the tenure as you are ready to pay higher EMIs.
Extend your tenure if affordability is an issue
Home is one of the greatest assets that many people will have in their lives, and for some it is their only major asset. Hence, most home buyers while buying a home stretch their financial capacity to get the home of their dreams and finally take the highest possible home loan. Many such borrowers at the initial stage of the loan may not be comfortable with a sharp increase in EMIs. Such borrowers can explore the option of tenure extension with their lender.
In many circumstances, lenders prefer instead to increase the EMI amount that the borrower chooses to extend the tenure as and when there is scope. This usually happens with short term home loans. If the loan is taken for 15 or 20 years, lenders usually extend it to 20 or 25 years. In case of home loans with tenures of 25 years or 30 years, the scope for extension of tenure is limited.
Apart from this, there is another factor that determines whether your loan will get tenure extension or not – how far you are from retirement, i.e. your age. If the borrower has a long time left for retirement, the lender will usually extend the term of the loan. For example, if you have taken a home loan for 20 years at the age of 35, the lender can extend the tenure to 5 years so that it goes up to the normal retirement age of 60 years.
Go for Partial Prepayment
If you have savings or investments that are earning returns less than the rate of interest that you are paying on our home loan, use it to partially prepay your home loan to control EMI outgo It is better to do However, you need to take into account the interest payment on your home loan and the tax benefit you will get on repayment of the principal. If the net profit in prepayment is high then you should go for prepayment. Otherwise you can keep your investment.
“At such times, it is advisable to prepay in any shape and form to control your interest outflow. You can deduct non-essential expenses to save money for prepayments. Also, borrowers may feel pinched in the short term, but they will get better once the rate cycle reverses,” says Shetty. “This will help them reduce their loan tenure and EMI. Economies around the world are battling recessionary trends. In times like these people need to calibrate their finances to adjust for these difficulties,” says Shetty.
“If you have taken a home loan at 7% for 20 years, your interest per lakh is ₹86,071. Your EMI per lakh is ₹775. If your rate drops to 8.9% after 3 months, you have There are 237 EMIs left but now it can theoretically go up to 410 months assuming a single EMI. Assuming larger EMIs, the tenure extension will be shorter. But at 410 months, your loan is 173 months or about 14.5 years long. At this stage , If you have made an immediate prepayment of 17 times your EMI, your tenure is reduced to 236 months. Four prepayments of 4.5 times EMI once every 12 months have almost the same effect in reducing your tenure It is,” says Shetty.
foreclose high interest arrears
Apart from home loan, if you have taken expensive loans like personal loan, consumer durable loan, two-wheeler loan, used car loan or revolving credit from credit card, instead of prepaying your home loan, which is the least expensive loan If you prefer to foreclose these expensive loans to reduce the overall EMI burden in your monthly household budget, you should.