As record high inflation becomes a global concern, most central banks in various countries have started raising rates to suck liquidity from the financial system and curb inflation. When the Covid 19 pandemic hit, RBI had cut the repo rate by 0.75% in March 2020 and 0.4% in May 2020 with an overall reduction of 1.15% within 3 months.
Going forward, there will be no surprise for RBI to do the opposite by raising the interest rate by a similar amount. “The interest rate hike regime is likely to continue until the RBI and major central banks continue to raise policy rates to reduce inflationary pressures,” said Ratan Chaudhary, Head of Home Lending, Paisabazaar .com. If the interest rate reaches almost the pre-pandemic level and increases by 1.25%, your EMI will increase by about 10%. For example, for a home loan of 30 lakh for 20 years at 6.75%, the EMI will increase from Rs 22,811 to Rs 25,093. Assuming that the EMI is 40% of net salary (according to the general practice of lenders), this increase will consume an additional 4% of your net annual salary.
Long-term borrowers, especially variable rate mortgage borrowers, will need to prepare for a sharp rise in interest rates in the months ahead. Several banks, NBFC and HFC have already raised mortgage interest rates sharply over the past two months. The () raised the interest rate by 0.4% on EBR and RLLR home loans, effective June 1, 2022. also raised the floating rate interest rate by 0.35%. It is expected that more lenders will pass on any rate increases to borrowers by raising lending rates. This may be just the beginning as multiple hikes are expected in the coming months until retail inflation cools to an RBI comfort zone of 2-6%.
Here’s how rising interest rates will affect your home loan EMIs.
External Benchmark Rate (EBR) EMI Home Loan Will Rise First
Most housing lending banks have opted for the repo rate as their benchmark lending rate and therefore any change in it will be immediately and completely passed on to the existing well as well as new borrowers. “Existing variable rate home loans linked to external benchmarks would see rate increases in line with their rate reset schedules. Borrowers would continue to repay at their existing home loan rates until the next reset date. The applicable interest rates on their next rate reset would then apply until the next rate reset date,” says Chaudhary. Banks are required to change their EBR at least once within 3 months while most of them are very proactive in raising rates quickly.
While EMIs of EBR home loans will increase the fastest, interest rates on home loans from other regimes like MCLR, Prime Rate and BPLR will also increase. “For Marginal Cost Based Lending Rate (MCLR), it is entirely up to the depository of the bank to raise or lower the rates, as it is governed by the internal body of a bank and so does even from the next reset date,” says V Swaminathan, Executive Chairman, Andromeda and Apnapaisa.
“The transmission of rate increases for new home loans offered by HFCs and NBFCs may be a little slower. HFCs and NBFCs can exercise more discretion in managing their home loan rates,” says Chaudhary . Although NBFCs are not as obligated as EBR to change their interest rate immediately, it does not take long for them to increase their interest rates as they find their cost of funds increasing after the rise in the repo rate.