With the Reserve Bank of India (RBI) lifting the repo rate once again to tackle inflation, banks have to raise interest rates on loans. In its fifth economic policy for the financial year (FY) on September 30, 2022, the central bank expanded (100 basis points = 1%) the policy rate by 50 bps.
Once made the official statement, NBFCs and some banks announced a comparable stroll in their external benchmark lending rates (EBLR).
One such bank is the public sector lender (PSL), State Bank of India (SBI). According to its website, SBI has increased its external benchmark lending rate (EBLR) and repo-linked lending rate (RLLR) by 50 bps. SBI’s EBLR is 8.55%, and RLLR is 8.15% as on October 1, 2022.
With the home loan rate increase, here is an example showing that the home loan EMI will increase significantly.
Assume you have carried a home loan of Rs 35 lakh for 20 years. The elder interest rate levied on your home loan is 8.05%, and the latest interest rate will increase to 8.55% (after the final interest rate hike).
The example above shows how an increase of 50 bps will likely impact the monthly EMI spend. The substantial rise in EMI will depend on the outstanding loan amount, the outstanding tenure of the loan, and the interest rate charged by the bank.
The bank will determine the interest rate for the mortgage loan, considering several factors. These include CIBIL score, borrower profile (salaried or non-salaried, female or male), risk assessment, loan-to-value ratio, etc.
Experts say that with the central bank raising policy rates further, borrowers can expect a further increase in interest rates on loans. However, if a borrower cannot afford the higher EMI outlay, they can choose to extend the tenure of the loan.
It notes that if borrowers extend the loan tenure instead of the EMI expense, they will pay more interest on the loan accepted.
Another possibility is to prepay the loan amount. If a borrower can prepay an exhaustive portion of the loan amount, this will reduce the outstanding loan amount. The bank will recalculate the EMI on the exceptional amount of the loan. That will be the EMI the borrower will have to pay until the interest rate rises again.
Neeraj Dhawan, Country Manager, Experian India, says, “Although the RBI has operated to bring down consumer price inflation (CPI) below its highs, it is still above the target range. The rising geopolitical tensions worldwide can be mainly attributed to this growth.
The rupee depreciated sequentially against the dollar. The rupee has outperformed reserve currencies and emerging currencies. The rate has increased by 50 basis points due to the recent interest rate hike by the US Federal Reserve and developments in the foreign exchange market.
Also, with the bank’s liquidity temporarily slipping into deficit territory, RBI seeks to support the market through increasing interest rates.
Atul Monga, Founder & CEO of Basic Home Loan, says: “RBI has increased its repo rate by 50 bps to curb inflation and control the volatility of the Indian rupee.
While banks will eventually have to pass on the higher costs to borrowers, this is less likely to happen during the current holiday season. With many Indians buying decisions during this time of year, financial institutions may not want to dampen the holiday spirit by hiking rates too soon.
From a homebuyer’s point of view, you should take advantage of these opportunities and take advantage of market discounts and seasonal offers to make your purchases, as interest rates remain below 9% per annum.”