reserve Bank of India (reserve Bank of India) in its monetary policy meeting held on 05 August, decided to increase repo rate again by 50 bps to 5.4 percent. Consequently, the reverse repo rate has also gone up to 3.85 per cent. The other key policy rates, i.e. the fixed deposit facility rate, have been increased to 5.15 per cent.
Most borrowers, whether new or existing (except fixed rate) home loan borrowers, will have to pay the increased EMIs in the coming days.
“Many banks have already started increasing home loan rates and this trend is expected to continue. Over the past year, the housing sector has seen an improvement in demand across sectors, and higher home loan rates are expected to increase the sentiments of home buyers. However, we do not see a significant impact on the high-end and luxury segments due to higher home loan rates,” said Ramesh Nair, CEO, India and Managing Director, Market Development, Asia , Colliers says.
how much your EMI will increase
The new rate hike cycle began on May 04, 2022, when the RBI increased the repo rate by 40 bps. This was the first hike in the repo rate after a gap of almost four years. Earlier, the repo rate was increased on June 06, 2018. The May 2022 hike was followed by another rate hike by the central bank during its June 8 monetary policy review, where it increased the repo rate by 50 bps. Consequently, within the last 93 days, the central bank has increased the repo rate by a total of 140 bps (50+90).
“With this repo rate hike of 50 bps, we are looking at the highest rates that existed before the pandemic during 2019. This lending rate calibration by RBI may indicate a decline in borrowers looking for home loans, as both new And EMIs are set to go up, ushering in a wait-and-watch attitude among new home buyers,” says Mr. V Swaminathan, Executive Chairman, Andromeda Loans and ApnaPaisa for existing home loans.
Due to these rate hikes by RBI, banks, NBFCs and housing finance companies are increasing their lending rates accordingly, which means your EMI has increased accordingly. If you have an outstanding of Rs 30 lakh and arrears at the rate of 8% per annum for the remaining period of 20 years, your EMI will increase by Rs 941 to Rs 25,093 from Rs 26,034. For every Rs lakh loan, you may have to pay an additional Rs 31.37 towards EMI.
Similarly for an auto loan of Rs.8 lakh for a period of 7 years if Rate of interest From 10.50% to 11%, the corresponding increase in EMI will be Rs 209 which will increase from Rs 13,489 to Rs 13,698.
On a personal loan of Rs 5 lakh with a tenure of 5 years, if the interest rate increases from 14.5% to 15%, your EMI will increase by Rs 131 to Rs 11,764 from Rs 11,895.
Will the rates increase further in the future?
Though rates have been hiked thrice, and RBI has signaled to take back housing, it doesn’t look like the end of the cycle. The primary factor driving these rate hikes is inflation. Retail inflation in India, as measured by the CPI, is still at a high as the CPI for the month of June stood at 7.01%.
“From a medium-term perspective, the trajectory of the repo rate is a function of global inflationary dynamics. In our view, even if inflation is at its peak now, it is far from dead. Unless there is an increase in supply in energy and industrial goods, any growth impulse will lead to inflation, especially since the situation in Ukraine is not over. Therefore, any sign of a pause in the rate-hiking cycle can only be considered as one in which all possibilities remain open based on growth inflation dynamics,” says Churchill Bhatt, executive vice president of debt investments. Huh,
Life Insurance.
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.
“While inflation is showing some early signs of moderation, we believe external sector risks are very high and on margins, to offset increasing pressure on INR, RBI should go ahead with rate hikes, even if The overall terminal rate may not eventually be too high. We expect a 85 bps hike in the repo rate to 5.75% by the end of 2022,” says Upasana Bhardwaj, Chief Economist.
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The rate hike cycle is expected to continue until global inflation shows any lasting signs of moderation.
When to go for tenure extension to manage EMI
Most home loan borrowers increase their financial capacity while buying their dream home. 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.
However, there is another factor that determines whether your loan will get tenure extension – 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 reaches the normal retirement age of 60 years. However, if the term ends too close to the retirement age, then tenure extension may not be possible.