After the RBI’s surprise repo rate hike by 0.4 per cent, the cost of borrowing has increased. In fact, many banks have already increased their lending rates, both for new and existing borrowers. What remains to be seen is how much the rate hike happens in the months ahead, thus pushing the borrowing cost even higher. It is widely expected that the RBI may go for additional repo rate hikes of up to 0.75 per cent or more in the coming months.
The immediate impact of the RBI repo rate hike is on the retail loans such as home loans which are linked to the bank’s external benchmark. Most banks have linked their lending rates to the RBI repo rate and, therefore, the impact is immediate for the borrowers.
For all those borrowers with RLLR loans, the impact on home loan can be seen mostly within three months when the banks re-set the loan terms with the borrower.
On a 15-year home loan, a 0.4 per cent increase in home loan interest rate pushes the EMI higher by 2.5 per cent. Assuming a loan outstanding of Rs 35 lakh, a 0.4 per cent increase in interest rate pushes the interest burden by almost 6.47 per cent (approximately Rs 1.42 lakh), keeping all other factors constant.
At 7.1 per cent ( on a Rs 35 lakh)
EMI – Rs 31,655
Interest paid – Rs 21,97,898
If rate increases by 0.4 per cent then at 7.5 per cent (on a Rs 35 lakh)
EMI – Rs 32,445
Interest paid – Rs 23,40,178
If the repo rate is further increased, the EMI will get pushed up higher. If the increase in home loan interest rate is 0.5 per cent and 1 per cent, the EMI goes by 3.1 per cent and 6.2 per cent respectively.
In general, the banks keep the EMI constant but increase the tenure of the loan. Therefore, for most RLLR loan borrowers, RBI repo rate hike means an increase in loan tenure thus impacting the total interest cost. In a home loan, the longer the tenure of loan, the higher is the interest cost and vice versa.
In contrast, the MCLR loan borrowers may not feel the pinch of a repo rate hike immediately. Even though RBI repo rate hike pushes the cost of funds for banks higher, they can revise the EMI or Tenure only when the re-set date arrives. The re-set date in MCLR linked loans is generally 12-months while for few banks it is even at 6-months intervals. SBI has already revised its 1-year MCLR upwards by 0.10 per cent effective May 15, 2022.
Overall, in a flexible home loan, the rate of interest will keep going up and down. The only way to decrease the home loan EMI or interest burden is to keep replaying the outstanding loan amount as and when you have surplus funds. The sooner you repay the loan, the lower will be the cost of owning your home.