Home loan in India largely depends upon the lending rates. The banks and other lending agencies fix these lending rates. Actually, RBI fixes repo rate bimonthly and all lending agencies including banks follow it for their lending rates.
How repo rate affects home loan?
RBI lends money to commercial banks on repo rates or repossession rates whenever there is the shortfall in banks funds. Basically, it is the discount rate at which RBI repurchases government securities back from these commercial banks. The RBI, bimonthly assess the quantum of total money to be in the economy. So, it increases or decreases the repurchase of government securities from commercial banks.
Let us suppose, RBI wants to increase the supply of money in the economy. Then it decreases the repo rate. This decrease of repo rate helps commercial banks and other institutions to lower lending rate. And so will interest charged on home loans will go down. The exact reverse is true when RBI needs to tighten money supply in the economy.
Will interest on home loan rise further?
On 6th June 2018, RBI’s Monetary Policy Committee has raised the key Repo Rate by 25 basis points. The RBI did this on inflation concerns arising from the surge in oil prices. This has happened for the first time in over four years. It now stands at 6.25%.
Repo rate is an important tool in the hands of monetary authorities to control inflation. In case of inflation, central banks increase repo rate. This disincentive commercial banks to borrow from the central bank. Hence, ultimately helps reduce the money supply in the economy and aids arresting inflation.
Further, if inflation continues to rise, then more hike is expected in the subsequent policy review meetings. This will continue the upward pressure on the interest rates on Indian banks. This is further going to lead the hike in their lending rates as well.
Which banks and institutions have revised their lending rates so far in 2018?
In the wake of this decision by Reserve Bank of India, many banks, in turn, have raised their lending rates. For instance, HDFC Bank has raised its marginal costs of funds-based lending rates by 10 basis points. The second-largest private lender did this across the board. In the similar lines, SBI, PNB, and ICICI Bank have also raised their MCLR.
Bank of India has hiked the MCLR-based lending rates by 10 basis points for various tenors. Bank of Baroda announced its decision to hike benchmark lending rate by 5 basis points across tenures. Following the footsteps of the big banks, Indian Bank and Karur Vyasa Bank notified the stock exchanges about raising the MCLR by up to 10 basis points for various tenures.
State-controlled Indian Bank has increased raised its MCLR by 10 basis points for loans with a tenure of 3 months to 5 years. Also, Karur Vyasa Bank has made similar raise for loans having a tenure of six months and one year. Bank of Maharashtra has hinted it will hike the lending rate soon.
The country’s largest mortgage lender Housing Development Finance Corp also raised its retail prime lending rate (RPLR), on which its adjustable-rate home loans are benchmarked by 0.10 percent, effective June 2. Its home loan rates for salaried class currently range between 8.50 percent to 9.15 percent.
How banks fix interest rates for housing loans?
Banks review the MCLR every month, which is a uniform methodology introduced from April 2016 to ensure fair interest rates to borrowers as well as banks. MCLR which is known as benchmark lending rate to which all other loan rates are linked directly or indirectly.
Any increase in the MCLR would definitely impact equated monthly installments (EMIs) for various loans like home loan, car loan etc. and other products as well. Most of the Home Loans are on floating rates, the rise will not affect the banks while transferring the financial pressure directly on the current and future homeowners in the form of increased EMI.
Check your interest outflow due to increased EMI
We look at how the interest and EMI outflow is to be affected, owing to increase in the loan interest rates. Assume, you have an INR 30L with an interest rate of 8.4%. That means you are paying INR 252,000 as interest. Now, suppose your bank passes on the 25 basis points increase in repo rate to you. The new effective interest rate will become 8.65%. Your interest payment will increase by INR 7,500 to INR 259,500.
The impact is harder as the loan amount goes up further. For instance, for a home loan of INR 3 crores, the upshot is INR 50,000 at just a 25 basis points increase. Moreover, this is from a simple interest calculation.
Ideally, EMI payments follow compound interest. Let us understand this with an example. Say, you have the INR 30L loan for a period of 10 years at 8.4% interest rate. Your EMI payments see an increase of INR 4,800 per year for a 25 basis points increase. For a 20 year term, it is INR 5,700 per year. For higher amounts such as an INR 3 crore loan for a 10 year period, the yearly increase in EMI payments is a whopping INR 48,000.
How you should you save yourself from extra burden of rising in EMI on the home loan?
The rise in repo rate can cause a huge dent in the common Indian household economics. Especially since the repo rate change would be felt in other financial areas too, in a household. There are, however, a few options current and potential homeowners can explore to counterfeit some of the effects of the interest rate hike including pre-payment and refinancing.
Before applying for a home loan, understand the nature of the interest rates i.e. fixed vs floating interest rates. This policy change is not going to affect the fixed home loan interest rate. It will not change during the whole tenure. While floating home loan interest rate changes with changes in the base rate. However, floating rates are in general lower than the fixed rates.
Also, whether you are a new customer or an existing one, make sure your financiers alerts you about all policy changes. Many financiers, to attract new customers, tend to give a better deal to the new customers in terms of interest rates and other benefits.
Make sure, you are aware of this discrepancy, if any, and raise concerns. Do not hesitate to negotiate/re-negotiate with your financier, as RBI gives the right to the customers to negotiate the best possible deal for themselves.
You can also move your loan to a better financier, in case none of these workouts.
Another way to reduce your overall burden is re-adjustment of your loan tenure. Keep in mind, do not accept the extension of the tenure. As it will only increase your overall interest burden. However, a shorter tenure with slightly higher EMI could substantially decrease the interest burden on your home loan.