Any future increase in the cost of deposits might force banks and HFCs to increase their lending rates despite the status quo in the RBI policy rates.
The Reserve Bank of India, as widely expected, kept its key policy rate unchanged at 6.50% in its monetary policy review on Wednesday. Still, all types of loans – including home loans, personal loans and car loans – are likely to cost more in the near future, as per experts. In fact, many banks and housing finance companies (HFCs) – including SBI, HDFC Bank and ICICI Bank — have already increased their MCLR and lending rates in recent months, primarily owing to the rise in their cost of funds. For instance, while the current floating interest rates of SBI home loan range between 8.7% and 9.45%, the floating interest rates of HDFC Bank home loan are hovering between 8.8% and 9.2%.
It may be noted that a majority of industry experts and market analysts were already of the view that the RBI may maintain status quo on its policy rates in the December policy review.
For instance, Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, was of the view that the Monetary Policy Committee (MPC) may continue with the status quo on the repo rate due to lower inflation and moderating economic growth. “The rupee’s appreciation against the US dollar and a sharp fall in crude oil prices will also encourage the MPC to remain in a wait-and-watch mode,” he said.
Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, was also expecting the RBI MPC to keep the repo rate unchanged along with maintaining the stance at ‘calibrated tightening’. “The RBI should maintain a watch on the core inflation too which continues to be at uncomfortable levels. While we believe that the RBI will likely pause for the rest of FY2019, it will likely remain watchful on any upside risks to inflation emanating from global and domestic factors,” he said.
Impact on borrowers
Whatever be the case, borrowers are unlikely to get any respite from the rising loan rates. According to experts, repo rate is just one of the several factors that banks consider while fixing their lending rates. They also consider their cost of deposits, tenor premium, operating cost, etc. while setting their lending rates. Therefore, any future increase in their cost of deposits might force them to increase their lending rates despite the status quo in policy rates.
For example, “despite the status quo in the repo rates during the October MPC meeting, many banks have increased their MCLR and lending rates since then, primarily due to the rise in their cost of funds. As far as Housing Finance Companies (HFCs) are concerned, their lending rates are most likely to increase due to the tight liquidity scenario. As a major chunk of their borrowing would need to be refinanced in the short term at higher rates, it will increase their cost of funds and thereby, their lending rates for both the new and existing investors,” informs Kukreja.
Here is a look at how any increase in the home loan interest rates will impact your EMIs:
Suppose, Delhi-based Rohit Kapoor is looking for a housing loan of Rs 60 lakh for buying a flat of Rs 80 lakh. If Kapoor takes a home loan of Rs 60 lakh at the current rate of, say, 8.75% for 20 years, this would imply an EMI of Rs 53,022. Over 20 years, Kapoor would be paying Rs 67,25,433 as interest. A 25 bps increase in the interest rate would increase the EMI to Rs 53,983 and the total interest paid to Rs 69,56,054. A 50 bps rate hike, on the other hand, would increase the EMI to Rs 54,952 and the total interest payable to Rs 71,88,482. That’s Rs 2,30,621 more in case of a 25 bps rate increase and Rs 4,63,049 more in case of a 50 bps rate hike.
Impact of Home Loan Rate Hike on EMI & Total Interest Payable:
What should home loan borrowers do?
According to experts, as home loan rates vary widely across various banks and housing finance companies (HFC), those planning to avail home loans should extensively compare lending rates offered by various lenders before making any application.
Similarly, “the existing home loan borrowers should compare the home loan rates offered by other lenders and find out the potential savings on transferring their loans at lower rates. If the savings are significant after accounting the transfer costs, they should first negotiate with their existing lenders for a rate reduction. If their existing lenders refuse to do so, they should opt for home loan balance transfer,” advises Kukreja.