With record high inflation becoming a global concern, most of the central banks of various countries have started rising rates to suck liquidity from the financial system and cool down the inflation. When the Covid 19 pandemic hit, RBI had reduced the repo rate by 0.75% in March 2020 and 0.4% in May 2020 with an overall reduction of 1.15% within a span of 3 months.
Going forward, there will be no surprise for RBI to do the reverse when hiking the interest rate by similar proportion. “The rising interest rate regime is expected to continue till the RBI and the major central banks continue to increase their policy rates for reducing the inflationary pressures,” says Ratan Chaudhary – Head of Home Loans, Paisabazaar.com. If the interest rate reaches to near pre-pandemic level and goes up by 1.25%, your EMI will go up by around 10%. For instance, for a 30 lakh home loan for 20 years tenure taken at 6.75% the EMI will go up from Rs 22,811 to Rs 25093. Assuming the EMI to be 40% of the net salary (As per general practice by the lenders) this hike will eat up additional 4% of your net annual salary.
Long term borrowers, especially the floating rate home loan borrowers, will have to brace for a steep hike in interest rates in the coming months. Several banks, NBFCs and HFCs have already increased home loan interest rates sharply in the last two months. The () has raised the interest rate by 0.4% on EBR and RLLR home loans, with effect from June 1, 2022. has also raised the floating rate interest rate by 0.35%. More lenders are expected to pass on all the rate hikes to borrowers by raising lending rates. This may only be the beginning as multiple hikes are expected within coming few months till the time retail inflation cools down to a comfort zone of RBI, which is 2-6%.
Here is how the interest rate hike will affect your home loan EMIs.
External Benchmark Rate (EBR) home loan EMI will go up first
Most of the home loan lending banks have opted for the repo rate as their benchmark lending rate and hence any change in this will be immediately and completely be passed on to the existing well as new borrowers. “Existing floating rate home loans linked to external benchmarks would witness rate hikes as per their rate reset schedules. Borrowers would continue to repay at their existing home loan rates till the next reset date. The interest rates applicable on their next reset rate would then be applicable till the following rate reset date,” says Chaudhary. Banks are mandated to change their EBR at least once within 3 months while most of them are very proactive in raising rates quickly.
While EBR home loan EMIs will be quickest to go up, next in line will be the home loan interest rates of other regimes like the MCLR, base rate and BPLR will also go up. “For the Marginal Cost based Lending Rate (MCLR), it is entirely on the bank’s deposition to hike or cut the rates, as the same is governed by a bank’s internal body and the same is effective from the next reset date,” says V Swaminathan, Executive Chairman, Andromeda and Apnapaisa.
“The transmission of rate increases for fresh home loans offered by HFCs and NBFCs could be a bit slower. HFCs and NBFCs can exercise greater discretion in managing their home loan rates,” says Chaudhary. While NBFCs have no such compulsion as EBR to change their interest rate immediately, however, it doesn’t take much time for them to raise their interest rates as they find their cost of funds going up after the repo rate hike