Every time the RBI increases the repo rate, banks pass on the increase to consumers in the form of a higher rate of interest. Borrowers, in turn, have the option of extending the tenure of their loans or increasing the Equated Monthly Installment payments.
Vivek Iyer, National Leader, Grant Thornton India, says that in a rising interest rate scenario, home loan EMIs, which are usually based on floating interest rates, will increase. They say that this will put pressure on the budget of home loan owners and affect their discretionary spending.
When will the home loan EMI peak?
According to Adil Shetty, CEO, BankBazaar.com, borrowers who have availed home loans at very low rates in the recent past need to be cautious about the hike in their rates. Mathematically, a 20-year loan taken at 6.50% with a fixed EMI could be 33 years old if the rate moves to 8.40%, he tells TOI.
In the table below, BankBazaar.com outlines what the likely impact of the 190 basis points has been increase in repo rate 50 lakh on home loan EMIs so far this year. Additionally it looks at a possible increase in EMIs if the repo rate is increased by another 50 basis points in this financial year.
For home loans with continuous EMIs, the loan tenure can be extended, as seen in the table below. However, if the rate moves from 6.50 to 8.90, the loan tenure will exceed the maximum allowable tenure, which is often 360 months, notes BankBazaar.com.
At that point, the EMI of the borrower would also increase because theoretically, the rate hike would create an absurd situation where a 20-year loan could become a 60-year loan. Hence in the table above, the tenure is capped at 360 months.
Grant Thornton India’s Vivek Iyer says that while home loan rates have been linked to external benchmark rates, the rate hike has already been passed. However, where home loan rates are tagged with the old interest rate regime such as MCLR, Base Rate or BPLR, the rate hike will be passed on to customers with a delay. “It is less about the tenure of the loan and more about how the home loan interest rates are linked to the repo rate for the loan,” Iyer told TOI.
In a recent survey of economists and experts conducted by Times of India Online, a majority expect the central bank to hike the repo rate by 30 to 60 basis points this fiscal. The trajectory of the repo rate cycle depends not only on inflation coming under control, but also on rate hikes by the US Federal Reserve.
Nevertheless, the broad consensus among the experts surveyed is that the rate hike cycle will soon be over. This means that soon your home loan EMI will peak!
What should borrowers do?
Atul Monga, CEO, Basic Home Loans, says that borrowers who are already feeling the pressure of hike, always have the option of extending their tenor to keep the EMI stable. “By doing this, the total interest paid by the borrower will be higher, but the EMI will remain the same. This will give the borrower some breathing room in terms of their monthly cash flow,” he explains.
Adil Shetty of BankBazaar.com recommends that borrowers should make prepayments systematically to deal with their rising interest burden. He tells TOI, “Prepaying 5% of the loan balance once a year can help pay off a 20-year loan in 12 years. The math varies from one borrower to another.” “The aim should be to repay any loan within its stipulated time frame and not let the interest balloon out of control,” he says.
Atul Monga believes that despite the rate hike, home loan interest rates are still relatively low compared to pre-pandemic levels. “One of the main reasons for this is that the RBI has asked banks to take a lenient approach towards borrowers who are facing difficulties in repaying their loans due to post-pandemic stress,” he tells TOI. “This is good news for borrowers, as it means they will still be able to afford their repayments,” he explains.
According to RBI data on deployment of bank credit, housing loans outstanding in September 2022 increased by 7.2% over March 2022. Adil Shetty of BankBazaar.com points out that this segment has grown almost twice as fast in the last six months. Car loans grew nearly 12% compared to 1.8% in the previous six months for the same time-frame.
“Interest rate movements are cyclical. Individual readiness to borrow is the key. Eligible borrowers will be able to avail financing regardless of interest rates,” concluded Shetty.