The woes of home loan borrowers will continue as the Reserve Bank of India (RBI) hiked the repo rate yet again in its bi-monthly monetary policy review. On August 1, the central bank announced a 25 basis points (bps) hike in the repo rate. With the latest hike, the repo rate now stands at 6.50 percent. One basis point is equivalent one-hundredth of a percentage. RBI had increased rate by 25 bps in the previous policy review after a gap of four-and-a-half years.
Repo rate is the rate at which the central bank lends money to the banks. The RBI also hiked the reverse repo rate (which now stands at 6.25 %). This is the rate at which banks lend money to the RBI.
How your EMIs are likely to be impacted
A hike in repo rate will have a direct impact on borrowers as banks are likely to increase interest rates on loans in tandem. This is because a hike in repo rate will mean that banks’ marginal cost based lending rate (MCLR) in all likelihood will go up. Since the start of the year, many banks have been increasing their MCLR.
According to the central bank’s mandate, all loans including home loans disbursed on or after April 1, 2016 should be linked to MCLR. Banks are free to decide whether to charge additional mark-up over and above MCLR or not. However, the lending rate cannot be below the MCLR.
There has been a total of 50 bps hike in the repo rate over the last two MPC meetings. If we consider a 25 bps hike in MCLR, this is how much home loan EMIs could be impacted
What it means for borrowers
Naveen Kukreja, CEO & Co-Founder, Paisabazaar.com says, “Policy rates set by the MPC is not the sole factor for determining banks’ MCLR. They also give major weightage to their cost of deposits while calculating MCLR. Thus, irrespective of whether the MPC increases the repo rate, any increase in banks’ fixed deposit rates will increase their cost of deposits, thereby leading them to hike their MCLR.”
Post this rate hike, if you plan on taking a loan, you should not wait any longer. Banks have started raising interest rates on loans even before the central bank started hiking key rates. State Bank of India (SBI) and ICICI Bank raised MCLR just a couple of days before the MPC meeting held in June. Others like Bank of India raised its rates after the monetary policy. There is a possibility that banks will continue to hike interest rates.
Kukreja says, “As far as the new home loan borrowers are concerned, they should extensively compare home loan rates offered by various lenders before selecting a particular one. Home loan rates can vary widely depending on the lender, loan amount, and the profile of the borrowers.”
An option that new borrowers can consider is the Pradhan Mantri Awas Yojana scheme. It is a credit-linked interest subsidy scheme offered on the basis of your income level. The deadline to avail the benefit under this scheme is March 31, 2019. Click here to know more aboutPradhan Mantri Awas Yojana.
Increase in EMI and total interest cost
For home loans linked to MCLR : If your existing home loan is an MCLR-linked one, the EMI burden is likely to increase here on as banks have been hiking interest rates. However, this hike in EMI will be felt by you when the reset date of your home loan arrives. On the reset date, your future EMIs will be calculated based on the MCLR effective on that date.
Kukreja adds, “As and when the banks increase their MCLR, their existing home loan borrowers will continue to repay their loans in the existing rates till their next loan reset date. If the home loan rates increase after the reset dates, existing borrowers should first compare the home loan rates offered by other lenders and find out the potential savings on transferring their home loans. If the savings are substantial, they should first renegotiate with their rates with their existing lenders. If their existing lenders refuse to reduce their rates, then they should opt for a home loan balance transfer.”
For base rate linked home loans: If your home loan is linked to the base rate regime, then there is a bad news for you. SBI has hiked base rate by 25 basis points effective from July 1, 2018. Post this hike, its base rate stands at 8.95 percent. Thus, if your home loan is still linked to the base rate, you should consider switching to an MCLR based loan.
“Home loan borrowers falling under the base rate regime should shift their loans under the MCLR regime, irrespective of any changes in the policy rates or their banks’ home loan rates. MCLR is a superior rate setting mechanism than base rate system due to the higher transparency in rate-setting and better transmission of policy rates. This ensures the transmission of policy rate changes to the existing borrowers,” adds Kukreja.