After the RBI has increased the repo rate by 50 bps to 5.9 per cent, customers are going to see a rise in their loan EMIs further, including personal loans, home loans, and car loans. This is the fourth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June and August. In all, RBI has raised the benchmark rate by 1.90 per cent since May this year.
The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das decided in favour of the rate hike.
Repo rate is the rate at which the Reserve Bank of India lends money to banks and other financial institutions. It must be noted that the all-floating rate retail loans sanctioned by banks after October 1, 2019 are linked to an external benchmark. For most of the banks, this external benchmark is repo rate. Rising repo rate will shoot up the interest rates of repo-rate linked home loans and personal loans. Home loans linked to Marginal Cost of Funds-based Lending Rate (MCLR) and Base Rate will also become expensive as borrowing cost of the banks will surge after repo rate hike.
Impact on Home Loan Borrowers
Home loans linked to repo rates would have the quickest transmission of increased policy rates. The transmission of the increased policy rates to fresh home loan borrowers would depend on the interest rate reset dates fixed by their banks as per their lending guidelines. The interest rates for existing home loan borrowers would be increased from the interest reset dates set by their lenders. Till then, they would continue to repay their home loans at existing interest rates.
V Swaminathan, executive chairman of Andromeda loans and Apnapaisa.com, said, “In a scenario such as this, the cost of borrowing will increase, pushing banks and other financial institutions to increase their lending rates, making EMIs costlier.
He added that with the latest rate hike, home loan rates will increase. “People opting for home loans should be very cautious and calculative in times such as these.”
Amit Goyal, CEO of India Sotheby’s International Realty, said, “From a home buyers’ perspective, home loan rates will still remain below 9 per cent per annum and they must utilise this opportunity and make their purchases by cashing in on offers and festive discounts in the market.”
Advice to Home Loan Borrowers – New and Existing
Existing home loan borrowers should opt for the EMI increase option, with the consent of their lenders, as and when their interest rates are increased. The total interest cost incurred on opting for the EMI increase option would be lower than the tenure increase option. Borrowers having restricted monthly surpluses can opt for the tenure increase option as their EMIs would remain the same.
Existing home loan borrowers having adequate surpluses can also prepay their home loans to reduce the impact of rising home loan rates. They should preferably opt for the tenure reduction option to generate higher savings in interest cost.
Fresh home loan borrowers as well as the existing ones having restricted liquidity can opt for the home saver option. Many lenders have branded this home loan variant as a home advantage loan, max gain, max saver, etc. Under this facility, an overdraft account is opened in the form of a savings or current account where the borrower can park his surpluses and withdraw from it as per his financial requirements. The interest component of the home loan is calculated after deducting the surpluses parked in the savings/current account from the outstanding home loan amount. Thus, this facility allows home loan borrowers to derive the benefit of making prepayments without sacrificing their liquidity.
Existing home loan borrowers who have witnessed substantial improvements in their credit profile after availing their home loans can opt for a home loan balance transfer to reduce their interest cost. Their improved credit profile may make them eligible for availing home loans from other lenders at much lower interest rates.
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