Repo Rate Rise: A 2.5% Rise In Interest Rate Hikes Home Loan EMIs By A Huge 20%

To rein in inflation and curb demand, the central bank has raised repo rate by 250 basis points since May 2022, and it could rise further. The news is not pleasing for retail loan customers. A rise in interest by 25 basis points, translates into an increase in EMI by Rs.820 per month for a loan of Rs 50 lakh with tenure of 20 years
Repo Rate Rise: A 2.5% Rise In Interest Rate Hikes Home Loan EMIs By A Huge 20%

High returns are great, but they come with some side effects, too. Bank fixed deposit investors are basking in the sun of higher deposit rates. Banks have been continuously raising interest rates on fixed deposits on the back of the rise in repo rate by the Reserve Bank of India (RBI).

Since May 2022, the RBI has increased the repo rate by 250 basis points, and considering the prevailing inflation, experts are of the opinion that in the next policy review, which is scheduled from April 3-6, 2023, RBI will raise the interest rate by 25 basis points. This is not at all a pleasing new for borrowers, especially the retail ones.

A Big Hole In The Pocket Of Home Loan Borrower

Buying a home is the top-most priority for most Indians. Typically, people borrow money from the bank to buy a house, and pay back the interest amount on the loan along with the loan amount to the bank.

As the RBI continues to raise interest rates, borrowers who have opted for a floating rate of interest on their home loans are now feeling the heat. They are now faced with the prospect of shelling out more money on their equated monthly instalments (EMIs), or increasing their loan tenure.

Banks have increased their interest rates on home loans exponentially over the past year in line with the RBI’s successive repo rate hikes, currently at 6.5 per cent from 4 per cent in May 2022. With the increase of 2.5 per cent in rate of interest, the EMI has gone up by a huge 20 per cent, if the tenure has been kept unchanged.

Let us for calculation purpose consider a loan of Rs 50 lakh for 20 years at 7 per cent floating rate of interest. The EMI for the loan has now gone up to Rs 46,607 from Rs 38,764 with the rise in interest rate to 9.5 per cent.

This translates in to an increase of 20.22 per cent in EMI outgo per month. Technically, if you do not want to increase the EMI, and increase the tenure, you can get rid of this 20 year loan in the next 60 years.

In reality though, banks do not allow you to take a loan beyond 30 years. This means that you cannot stretch your tenure beyond a point. In a realistic way, if you crease your tenure to the maximum limit of 30 years, still your EMI goes up by 8.45 per cent.

The Way Forward

The hike in the deposit rate should attract more customers to park their funds in banks deposits to lock it with higher returns. This means liquidity will not be an issue for banks going forward, and depositors will earn higher returns on their FDs. Does this mean interest rates will come down in the future? Only time will tell.

We will come up with a detailed story tomorrow on the same topic. Keep watching this space.

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