Within hours of the Reserve Bank of India (RBI) hiking its repo rate by 50 basis points (bps) on September 30, 2022, several banks, namely, ICICI Bank and Axis Bank, as well as non-banking housing finance companies, such as HDFC Ltd and LIC Housing Finance, increased their home loan rates by almost the same proportion, effective from October 1, 2022.
It may be noted that while some experts were expecting the RBI to hold the interest rates until the festive season got over, that has not been the case.
HDFC Limited hiked its home loan rate by 50 bps. In total, HDFC has implemented seven rate hikes in the last five months.
HDFC Limited said in a statement: “HDFC increases its retail prime lending rate (RPLR) on housing loans, on which its adjustable rate home loans (ARHL) are benchmarked, by 50 basis points, with effect from October 1, 2022.”
LIC Housing Finance has also increased the LIC Housing Prime Lending Rate (LHPLR), the benchmark rate to which all its loans are linked, by 50 bps.
Higher Interest Rates
The rate of interest on home loans at HDFC Limited starts at 8.10 per cent per annum. For Axis Bank, the rate of interest rates (floating rate) on home loan is in the 8.10-8.45 per cent range for salaried individuals. For self-employed individuals, the effective rate of interest (floating rate) is 8.20-8.55 per cent.
At ICICI Bank, the floating rate of interest for salaried borrowers, for a home loan of up to Rs. 75 lakh, is between 8.1 per cent and 8.85 per cent. For loans above Rs. 75 lakh, this rate of interest is 8.1-8.95 per cent. These interest rates are applicable on loans for purchasing a house, for home interior, renovations, and home expansion.
How Much Will the EMIs Increase?
All existing home loans on floating rate of interest will become more expensive, as banks have decided to pass on the hike to their customers. In effect, borrowers will either have to pay increased equated monthly instalments (EMIs).
Says Raj Khosla, founder and managing director of MyMoneyMantra.com, a loan aggregator: “On a Rs. 50 lakh home loan on a 20-year tenure at a rate of interest of Rs 8.6 per cent, the customer will now have to pay an EMI of Rs 43,708, against Rs. 42,134 before this rate hike. This translates into an increase Rs 3,77,760 for the customer over the entire tenure of the loan.”
He suggests that the customers should make partial payment against their loan accounts, if possible, as the interest is charged on the outstanding amount. This can help the customer in maintaining the same EMI rate over the rest of the loan duration.
Adhil Shetty, founder and CEO of BankBazaar.com, a financial services website, explained how the hike in the interest rate cycle over the last few months will affect the total EMI payment over the duration of the loan.
“Between May 2022 and October 2022, the repo has gone up by 190 bps. The full impact of this hike on a Rs 30 lakh home loan would mean EMIs going up by Rs 3,540, and the overall interest to be repaid over 20 years going up by Rs 8.50 lakh. We have crossed the point of easy repayments. The August hike itself indicated that the time for tenor extensions is over. With this hike, borrowers can expect their EMIs to go up. This will be especially severe for those who have not made any prepayments on their loans.”
What Should You Do?
This has been the fourth rate hike in the last five months. Financial planners say that existing borrowers, who have taken loans on floating rate basis will have to face a bit of hardship.
“The EMI will go up, as the interest component will go up. In this case, the remaining loan tenure is not altered. If EMI is not increased, the tenure of loan will get extended. Based on one’s cash flow, one will have to plan accordingly to cope up with the pressure. Ideally, we have to focus on redoing the family budget, so that we can figure out if we are in a position to increase EMI and keep the tenure intact,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.