How much your EMI will jump per lakh of loan?

After enjoying decadal low interest rates, borrowers will now have to brace for continuous interest rate hikes on their loans. This is because the Reserve Bank of India (RBI) in its monetary policy meeting held on June 08, decided to increase the repo rate again by 0.5% to 4.9%. This comes within 36 days of last repo rate hike of 40 bps done on May 4, 2022. New borrowers and existing floating rate borrowers like home loan borrowers will have to dole out higher EMIs for their loans.

How much your EMI will increase

After the current hike, the total increase in repo rate is 0.9%. Due to the rate hikes by the central bank, lenders like banks and housing finance companies, will increase their lending rates correspondingly, which in turn means that your EMIs will go up accordingly. If you have a home loan with Rs 30 lakh outstanding with a balance tenure of 20 years at 7% pa interest, your EMI will go up by Rs 1,648 from Rs 23,259 to Rs 24,907. For each lakh rupee of loan, you may have to dole out Rs 55 extra for EMI.

Similarly for an auto loan of Rs 8 lakh for a tenure of 7 years if the interest rate rises from 10% to 10.9% the corresponding increase in EMI will be Rs 375 from Rs 13,281 to Rs 13,656.

On a personal loan of Rs 5 lakh with a tenure of 5 years, if the interest rate rises from 14% to 14.9% your EMI will increase by Rs 235 from Rs 11,634 to Rs 11.869.

This may not be the last rate hike

These two hikes in quick succession do not look like the end of the rate hikes. Inflationary factors are yet to show any durable sign of subsiding. “We may have seen the peak of inflation for now, but we may not have seen the end of it yet,” says Churchil Bhatt, Executive Vice President & Debt Investments,

Life Insurance. Till the time inflation comes down within the comfort zone of RBI, which 2-6%, it will be compelled to exercise the interest rate hike option among other inflation control options.

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The government had to resort to the non-conventional way of curbing inflation which was by reducing the taxes on petroleum products. However, there has been only a marginal impact on growing inflation. Unless there is a durable sign of the global inflation coming down, the rate hike cycle would be the major tool which the RBI will use to suck out liquidity from the domestic financial system and contain inflation.

When tenure is extended instead of EMI

Most of the home loan borrowers stretch their financial capacity while buying their dream home. Many such borrowers at the initial phase of the loan may not be comfortable with the sharp increase in EMIs. Such borrowers may explore the option of tenure extension with their lender.

In many circumstances, lenders rather than increasing the EMI amount prefer that the borrower opts to extend the tenure if there is scope. This usually happens with home loans with shorter tenures. If the loan is taken for 15 or 20 years, lenders usually extend it to 20 or 25 years.

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Home loan interest rates to rise steeply; 7 ways to manage your home loan EMIs

However, there is another factor which determines if your loan will get tenure extension or not – how far you are from retirement, i.e., your age. If the borrower has a long time left for retirement, then the lender will typically increase the tenure of the loan. For instance, if you have taken a home loan for 20 years when you are 35 years old, then the lender can increase the tenure up to 5 years so that it goes up to the usual retirement age of 60 years.

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