RBI keeps repo rate unchanged, but here’s how you will get impacted if home loans become expensive

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Published: April 5, 2018 2:41:13 PM

The Reserve Bank of India, as widely expected, kept the repo rate unchanged at 6% in its first bi-monthly monetary policy review for 2018-19 today.

RBI, RBI policy, RBI policy rate, RBI policy date 2018, credit policy of RBI, monetary policy, home loan rates, MCLR, base rate, Some of India’s leading banks, including SBI, have already increased their marginal cost of funds-based lending rates (MCLR) and base rates recently.

The Reserve Bank of India, as widely expected, kept the repo rate unchanged at 6% in its first bi-monthly monetary policy review for 2018-19 today.  Earlier industry experts were of the view that the RBI will leave the repo rate unchanged in Thursday’s policy meeting, but most probably adopt a cautious tone in its MPC policy statement.

“Given the recent improvement in growth trends and easing of inflation of trajectory, the RBI is expected to continue with their neutral policy stance. However, the upside risks to inflation and crude oil prices is likely to lead them to adopt a cautious tone in their credit policy statement,” said Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

Killol P Pandya, Head-Fixed Income and Fund Manager, Essel Finance AMC Ltd, also said that RBI may reiterate its concerns relating to upside pressure on inflation due to rising crude, food inflation and increased MSP. “It may also reiterate concerns on fiscal slippage, global commodity and geopolitical risks,” he said.

Whatever be the case, some of India’s leading banks, including SBI, have already increased their marginal cost of funds-based lending rates (MCLR) and base rates recently, which is a confirmation of the reversal of softening interest rate cycle.

Industry experts say that apart from the repo rates, the cost of banks’ deposits also has a major weightage in the calculation of their MCLRs. Hence, the recent increases in their interest rates of fixed deposits and certificates of deposits have led them to increase their MCLR. With or without repo rate hikes, future increases in their cost of deposits too will translate into higher MCLR.

Some experts feel that loans – including home loans and personal loans – may not become expensive in the near term as liquidity with banks is still high and competition with NBFCs is getting tougher. But reversal in the interest rate cycle is surely bad news for borrowers, as loan rates are bound to go up – sooner or later.

Here’s how any hike in housing loan rates will impact your EMIs and the total outgo.

Suppose, Mr Mohit Sharma is looking for a housing loan of Rs 40 lakh for buying a house of Rs 50 lakh. If he takes a home loan of Rs 40 lakh at 8.30% interest, this would imply an EMI of Rs 34,208. Over 20 years, Mr Sharma would be paying Rs 42,09,984 as interest. A 25 bps increase in the interest rate would increase the EMI to Rs 34,840 and the total interest paid to Rs 43,61,508. A 50 bps rate hike, on the other hand, would increase the EMI to Rs 35,476 and the total interest payable to Rs 45,14,275. That’s Rs 1,51,524 more in case of a 25 bps rate increase and Rs 3,04,291 more in case of a 50 bps rate hike.

Impact of Home Loan Rate Hike on EMI & Total Interest Payable:

Current rateNew rateCurrent EMINew EMIDifference (EMI)Current interestNew interestDifference (Interest)
8.30%8.55%342083484063242,09,98443,61,5081,51,524
8.30%8.80%3420835476126842,09,98445,14,2753,04,291

What should you do if home loan rates go up?

As the home lending rates vary widely across various banks and housing finance companies (HFCs), new home loan borrowers should extensively compare the lending rates offered by various lenders before making a decision.

“Despite MCLR hikes by banks, existing home loan borrowers will continue to repay at older rates till the next reset dates of their home loans. If their home loan rates increase after their loan reset dates, they should compare home loan rates offered by other banks and HFCs and calculate the potential savings on transferring their home loan. If the savings are substantial, they should request their existing lender to reduce the interest rate. If the existing lender refuses, then they should opt for a home loan balance transfer,” says Kukreja.

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