The interest rate on home loans is expected to increase as the Reserve Bank of India on Wednesday announced an increase of repo rate by 25 basis points to 6.5 %.
Repo rate is the rate at which the RBI lends money to commercial banks.
Now, banks will have to pay a higher interest to RBI on the loans they take from the central bank. It is expected that the banks will pass the rise to various loans given, including home loans.
For people who have taken loans or who are planning to take, may expect an increase in their EMIs to accommodate the rate hike.
V Swaminathan, executive chairman, Andromeda Sales and Apnapaisa.com added that Repo rate is directly linked to loan rates offered by lenders so an increase in the repo will increase the borrowing cost and vice-versa.
The rate hike of 25 bps will make EMIs expensive by approximately 2-4%. Borrowers will either have to shell out extra money to repay their loans or will have to extend the loan tenure.
“If we take into consideration the current increase of 25 bps, the EMI for a 20-year home loan of Rs 70 lakh at 9.25 % was Rs 64,111. But when we factor in the 25 bps, the interest rate becomes 9.50 %, thereby increasing the EMI to Rs 65,249. The borrower of such a loan will have to pay an extra amount of Rs 1,138 each month,” Swaminathan said.
Swaminathan added that in the last three quarters, the repo rate has been increased by 250 basis points. So, the EMI for a 20-year home loan taken in May 2022 of Rs 70 lakh at 7 % was Rs 54,271.
“But when we factor in the 250-bps hike rate since May, the interest rate becomes 9.50 %, increasing the EMI to Rs 65,249. The borrower of such a loan will have to pay an extra amount of Rs 10, 978 each month.”
EMIs are set to get costlier. What should home loan borrowers do?
Saransh Trehan, Managing Director, Trehan Group, said, “Home loan rates will cross the level of 9% per annum. So far the demand in the housing sector remained unimpacted with past increase, but any further hike in interest rate will certainly put a break on the demand in the housing sector.”
Is increasing loan tenure or increasing loan EMI an option?
Ratan Chaudhary, Head, Home Loans, Paisabazaar, said, “Existing home loan borrowers can either opt for the EMI increase or tenure increase option, with the consent of the lender, as and when their home loan interest rates increase. Borrowers should note that opting for tenure increase option would result in higher interest cost than the EMI increase option.”
Existing home loan borrowers having adequate surpluses can prepay their home loans to reduce the impact of higher home loan rates. While doing so, they should preferably opt for the tenure reduction option to generate higher savings in interest cost.
Existing home loan borrowers who have made significant improvements in their credit profile after availing their existing home loans can exercise home loan balance transfer. Their improved credit profile may make them eligible to transfer their existing home loans to other lenders at much lower interest rates and thereby, reduce their total interest cost, Chaudhary added.
The Monetary Policy Committee (MPC) decision was announced by RBI Governor Shaktikanta Das.
Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor added that the banking sector, as one of the major beneficiaries of the repo rate hike, may see a positive impact, while sectors such as real estate and consumer durables may face some headwinds due to the higher borrowing costs.
Rate hike of 25 bps is considered appropriate at this juncture, monetary policy to remain agile, alert to inflation, Das said.
This could make the buyers apprehensive and they might adopt a wait-and-watch attitude in the real estate sector, said Shiv Parekh, Founder of hBits.
“Most importantly, when seen on a positive note, in varied sectors, the continued wage and job growth will provide a cushion in the short term for purchasing decisions. In the covid times, low home loan interest regime boosted the housing demand and enabled a robust recovery in the real estate sector post pandemic,” Parekh added.
The RBI had raised the key lending rate by 35 basis points in December, after three straight 50 bps hikes, and had said its fight against inflation was not over yet.
Several banks hiked their repo-linked lending home loan rates post the rate hike announced by RBI in December.
Meanwhile, RBI today projected retail inflation at 6.5% for 2022-23; 5.3% for next fiscal.
It projected GDP growth at 6.4% for 2023-24.
Amid volatile global developments, Indian economy remains resilient, Das said.
The decision of the six-member rate setting panel was announced by the Governor on Wednesday.
RBI Governor Das-headed MPC started its three-day meeting on Monday amid expectations of a smaller 25 basis points rate increase or a pause on the rate hiking spree that started in May last year to check inflation.
Since May last year, the RBI has increased the short-term lending rate by 225 basis points to contain inflation, mostly driven by external factors, especially global supply chain disruption following the Russia-Ukraine war outbreak.
The RBI has been tasked to ensure that retail inflation remains at 4 % with a margin of 2 %. However, it failed to keep the inflation rate below 6 % for three consecutive quarters beginning January 2022.
However, the retail inflation based on the Consumer Price Index (CPI) has shown signs of moderation in November and December as it fell below the RBI’s upper tolerance level of 6 %.
The MPC consists of three RBI officials and three external members appointed by the central government.
The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad).
Apart from the Governor, the RBI officials on the panel are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).
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