Once the official announcement was made, some banks and NBFCs announced a similar hike in their external benchmark lending rates.
One such bank is the public sector lender, State Bank of India (SBI). According to its website, SBI has increased its external benchmark lending rate (EBLR) and repo linked lending rate (RLLR) by 50 bps. SBI’s EBLR is 8.55% and RLLR is 8.15% with effect from October 1, 2022.
With the increase in the home loan lending rate, here is an example to show that the home loan EMI will increase.
Suppose you have taken a home loan of Rs 35 lakh for a tenure of 20 years. The old interest rate charged on your home loan is 8.05% and the new interest rate will increase to 8.55% (after the latest increase in interest rate).
Note that the above example is meant to show how a 50 bps increase in EMI can affect monthly spending. The actual increase in EMI will depend on the outstanding loan amount, pending tenure of the loan and the interest rate charged by the bank.
The bank will determine the interest rate to be charged on the home loan taking into account various factors. These include – CIBIL score, profile of the borrower (salaried or non-salaried, female or male), risk assessment, loan to value ratio etc.
What can borrowers do to reduce the EMI burden?
Experts say that the central bank may further increase policy rates, borrowers can expect further increase in loan interest rates in future. However, if a borrower is unable to pay the higher EMIs, she can choose to extend the tenure of the loan.
It should be kept in mind that if a borrower extends the tenure of the loan instead of spending EMI, then he will have to pay higher interest on the loan taken.
Another option is to prepay the loan amount. If a borrower is able to prepay a certain part of the loan amount, this will reduce the outstanding loan amount. The bank will again calculate the EMI on the outstanding loan amount. This will be the EMI that will be payable by the borrower till the interest rate is raised again.
What experts are saying about RBI rate hike
Neeraj Dhawan, Country Manager, Experian India, said, “Although the RBI has managed to bring down the Consumer Price Inflation (CPI) index below its highs, it is still above the target range. The increase in demand due to better credit conditions, supply-side issues and evolving geopolitical tensions around the world can mainly be attributed to this growth. The devaluation of the rupee against the dollar happened systematically. Rupee has outperformed reserve currencies, EM currencies. Recent interest rate hikes by the US Federal Reserve and developments in the foreign exchange market propelled the increase of 50 basis points. Also, with banking liquidity temporarily slipping into deficit zone, RBI is looking to support the market through hike in interest rates.
Atul Monga, Founder and CEO, Basic Home Loans says, “RBI has increased its repo rate by 50 bps to contain inflation and control the volatility of the Indian rupee. However, the increased cost will be passed on to the banks by the borrowers. But this is less likely to happen during the current festive season. During this time of the year as many Indians make their buying decisions, financial institutions would not want to dampen the festive spirit by hiking rates too soon. From the buyer’s point of view, they should take advantage of these opportunities and take advantage of seasonal discounts and offers in the market to make their purchases as interest rates remain below 9% p.a.”