After the RBI’s surprising repo rate rose 0.4 percent, borrowing costs continued to rise. In fact, many banks have already increased their lending rates for both new and existing borrowers. It remains to be seen how much the rate will increase in the coming months, thus pushing the cost of borrowing even higher. It is widely expected that the RBI may raise the additional repo rate by 0.75 per cent or more in the coming months.
The immediate effect of the RBI repo rate hike is on retail loans such as home loans linked to the bank’s external benchmark. Most banks have linked their lending rates to the RBI repo rate and, therefore, have an immediate effect on borrowers.
For all those borrowers, including RLLR loans, the effect on the home loan is seen in about three months when the banks reset the terms of the loan with the borrower.
On a 15-year home loan, a 0.4 percent increase in home loan interest rates raises the EMI to 2.5 percent. With a debt of Rs 35 lakh in arrears, a 0.4 per cent increase in interest rates would increase the interest burden by about 6.47 per cent (about Rs 1.42 lakh), keeping all other factors in check.
6.1 percent (Rs. 35 lakhs)
EMI – Rs. 31,655
Interest paid – Rs. 21,97,898
If the rate increases by 0.4 per cent then to 7.5 per cent (Rs. 35 lakhs)
EMI – Rs. 32,445
Interest paid – Rs.23,40,178
If the repo rate is further increased, the EMI will increase further. With interest rates on home loans rising 0.5 percent and 1 percent, EMIs rose 3.1 percent and 6.2 percent, respectively.
In general, banks keep EMI stable but extend lending. Therefore, for most RLLR borrowers, an increase in the RBI repo rate means that the increase in the term of the loan affects the total interest cost. In a home loan, the longer the term of the loan, the higher the interest rate and vice versa.
In contrast, MCLR borrowers may not immediately feel the pinch of repo rate hike. Although the RBI repo rate hike raises the cost of funds for banks, they can revise the EMI or maturity only when the reset date comes up. The rescheduling date on MCLR linked loans is usually 12-month while for some banks it is 6-month interval. SBI has already revised its 1-year MCLR by 0.10 per cent effective May 15, 2022.
Overall, on a flexible home loan, interest rates will continue to go up and down. The only way to reduce the EMI or interest burden on a home loan is to repay the outstanding loan amount when you have a surplus fund. The sooner you repay the loan, the lower the cost of owning your home.