Tuesday, May 30, 2023

Repo Rate Hiked By 25 BPS: How Much Will Your Home Loan EMIs Increase?

Outlook Money

Repo Rate Hiked By 25 BPS: How Much Will Your Home Loan EMIs Increase?

As the repo rate increased again by 0.25 per cent, what can borrowers do to ease the brunt of higher equated monthly instalments? Read on to find more

Reserve Bank of India (RBI) hiked the repo rate by 25 basis points (bps) on February 8, 2023. This is the sixth time that RBI has hiked the interest rate since May 2022, taking the total quantum of the hike to 250 bps mostly driven by external factors, such as Russia-Ukraine war. 

The monetary policy committee (MPC) meet consists of three RBI officials and three external members appointed by the central government. 

This is the first MPC meeting since the presentation of the Union Budget by finance minister Nirmala Sitharaman in Parliament a week earlier on February 1, 2023. 

With the hike in repo rate, all existing home loans on floating rates of interest are likely to become expensive, as banks may decide to pass on the hike to customers, thus, leading to an increase in the equated monthly instalments (EMIs) on home loans for buyers. 

According to experts, inflation should moderate in the long run which would have a mellowing effect on home loan instalments gradually this year. 

So, what will the hike in repo rate entail for the customer?

How Much Will EMIs Increase: The repo rate is directly linked to loan rates offered by the lenders. Thus, an increase in the repo will increase the borrowing cost and vice-versa. 

“The rate hike of 25 bps today will make EMIs expensive by approximately 2-4 per cent. Borrowers will either have to shell out extra money to repay their loans or will have to extend the tenure,” says V Swaminathan, executive chairman, Andromeda Sales and Aapnapaisa.com, loan distributors, in a statement. 

“If we take into consideration the current increase of 25 bps, the EMI for a 20-year home loan of Rs 70 lakh at 9.25 per cent was Rs 64,111. But when we factor in the 25 bps, the interest rate becomes 9.50 per cent, thereby increasing the EMI to Rs 65,249. The borrower of such a loan will have to pay an extra amount of Rs 1,138 each month. However, in the last three quarters, the repo rate has increased by 250 basis points. So, the EMI for a 20-year home loan taken in May 2022 of Rs 70 lakh at seven per cent was Rs 54,271. But when we factor in the 250-bps hike rate since May, the interest rate becomes 9.50 per cent, increasing the EMI to Rs 65,249. The borrower of such a loan will have to pay an extra amount of Rs 10, 978 each month,” says Swaminathan. 

Says Adhil Shetty, CEO, BankBazaar, a financial services website: “Let us take a loan of Rs 50 lakh, with a tenure of 15 years. The original interest rate in May 2022 was seven per cent after which we have seen six rate hikes. For the above loan, the EMI was Rs 44,941 at a seven per cent interest rate and before the rate hike today, it was Rs 51, 460. After the 25 basis points rate hike today, the EMI will go up to Rs 51,211. Also, if someone wants to increase the tenure and keep the EMI the same, after today’s hike, the tenure will become 270 months, instead of 180 months when the rate of interest was seven per cent. Before this rate hike, the tenure had to be 254 months to keep the EMI the same.”

Says Chenthil Iyer, founder and chief strategist, Horus Financial Consultants: “If a loan of Rs 30 lakh currently has an interest rate of 8.5 per cent and tenure of 20 years, then EMI would be Rs 26,034.7. With the increase in repo rate of 25 bps, the EMI would increase to Rs 26,511.32, an increase of approximately Rs 500. Alternatively, if someone decides to keep the EMI same, the tenure increases by one year.” 

When banks increase benchmark lending rates for home loans, you will be left with two options- to continue with the ongoing repayment schedule or switch to a higher tenure of the loan. 

What Should You Do: According to financial planners, the only way to control the rising costs of borrowing is to make pre-payments. It is important to not rush into breaking your investments and making prepayments. Instead, you could plan towards it. You could do it in different ways, depending on what suits your financial situation best. 

“For instance, a 20-year loan can be repaid in 12 years if you pre-pay five per cent of the loan balance once a year. Else, you could pay an additional 5-10 per cent over your existing EMI every month. Or you could pay an additional two-five EMIs every year or an additional EMI every quarter. Any and all of this would bring down your loan burden,” says Shetty. 

Moreover, he explains, what matters is the timeframe in which you intend to repay the loan. 

“For example, your intention was to repay a 20-year loan in 10 years, but the rate hikes have taken your tenure to 25 years. In this case, ensure that for the next 10 years, you pay back at least 10 per cent of the loan through a combination of EMIs and pre-payments. This will keep you on track for your goal. What is important is that you do it in a planned and structured manner so that your finances are not stretched but you make savings on your loan at the same time,” adds Shetty. 

Iyer suggests that increasing the EMI is always the right thing to do. 

“Only in extreme situations where the revised EMI is unaffordable, the tenure may be increased,” he adds.