The Reserve Bank of India (RBI) in its monetary policy meeting held on August 05, decided to increase the repo rate again by 50 bps to 5.4 percent. Consequently, the reverse repo rate has also gone up to 3.85 percent. Other key policy rates, that is standing deposit facility rate has been hiked to 5.15 percent.
Most of the borrowers, whether new or existing (except fixed rate) like home loan borrowers, will have to pay increased EMIs in coming days.
“Several banks have already begun rising home loan rates and this trend is expected to continue. Over the last year, the housing sector has seen a recovery in demand across segments, and the higher home loan rates could dent homebuyers’ sentiments, especially in the affordable to mid category. However, we do not see a significant impact on the high-end and luxury segments due to the higher home loan rates” says Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, Colliers.
How much your EMI will increase
The new rate hike cycle started on May 04, 2022, when the RBI increased the repo rate by 40 bps. This was the first hike in repo rate after almost a gap of 4 years. Before this the repo rate was hike on June 06, 2018. The May 2022 hike was soon followed up by another rate hike by the central bank during its June 8 monetary policy review where it increased the repo rate by 50 bps. As a result, within last 93 days, the central bank has increased the repo rate by a total 140 bps (50+90).
“With this repo rate hike of 50 bps, we are seeing the highest rates that existed pre-pandemic during 2019. This lending rate calibration by the RBI could signal a downward trend in borrowers looking for home loans, as both new & existing home loan emis are set to go up, ushering in a wait-and-watch attitude among new homebuyers,” says Mr. V Swaminathan, Executive Chairman, Andromeda loans and Apnapaisa.
Due to these rate hikes by the RBI, banks, NBFCs and housing finance companies have been increasing increase their lending rates correspondingly, which in turn means that your EMIs has gone up accordingly. If you have a home loan with Rs 30 lakh outstanding with a balance tenure of 20 years at 8% pa interest, your EMI will go up by Rs 941 from Rs 25,093 to Rs 26,034. For each lakh rupee of loan, you may have to dole out Rs 31.37 extra for EMI.
Similarly for an auto loan of Rs 8 lakh for a tenure of 7 years if the interest rate rises from 10.50% to 11% the corresponding increase in EMI will be Rs 209 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 rises from 14.5% to 15% your EMI will increase by Rs 131 from Rs 11,764 to Rs 11,895.
Will there be further rate hikes in future?
Even though rates have been hiked thrice, and RBI has hinted at withdrawal of accomodaation, it does not look like the end of cycle. The primary factor which is fueling these rate hikes is inflation. The retail inflation in India, which is measured by CPI, is still on the higher side as CPI for the month of June was 7.01%.
“From a medium-term perspective, trajectory of Repo Rate remains a function of global inflationary dynamics. In our view, while inflation may have peaked for now, but it is far from dead. Unless supply is augmented in energy and industrial commodities, any growth impulse will lead to an accompanying rise in inflation, especially since the Ukraine situation is far from over. Therefore, any hint of a pause in rate hiking cycle may be treated as just that, with all possibilities open depending upon evolving growth inflation dynamics,” says Churchil Bhatt, Executive Vice President Debt Investments,
Till the time inflation comes down within RBI’s comfort zone, which 2-6%, it will be compelled to exercise the interest rate hike option among other inflation control options.
“While some of the early signs of inflation moderation is visible we believe that the external sector risks remain abound and to offset, at the margin, the increasing pressure on INR, RBI should frontload the rate hikes even as the overall terminal rate may not eventually be very high. We continue to expect 85bps hike in Repo rate to 5.75% by end 2022,” says Upasna Bhardwaj, Chief Economist,
Unless there is a durable sign of the global inflation coming down, the rate hike cycle is expected to continue.
When to go for tenure extension to manage EMIs
Most of home loan borrowers stretch their financial capacity while buying their dream home. Many such borrowers at the initial phase of the loan may not be comfortable with the sharp increase in EMIs. Such borrowers may explore the option of tenure extension with their lender.
In many circumstances, lenders rather than increasing the EMI amount prefer that the borrower opts to extend the tenure if there is scope. This usually happens with home loans with shorter tenures. If the loan is taken for 15 or 20 years, lenders usually extend it to 20 or 25 years.
However, there is another factor which determines if your loan will get a tenure extension or not – how far you are from retirement, i.e., your age. If the borrower has a long time left for retirement, then the lender will typically increase the tenure of the loan. For instance, if you have taken a home loan for 20 years when you are 35 years old, then the lender can increase the tenure up to 5 years so that it goes up to the usual retirement age of 60 years. However if the tenure end is very close to retirement age then the tenure extension may not be feasible.