Home Borrower Lending EMIs are expected to increase further; more pain for future borrowers

Lending EMIs are expected to increase further; more pain for future borrowers


Loans will get expensive as RBI hikes rate

Photo: BCCL

Be prepared to pay even higher EMIs as your bank may soon announce another interest rate hike on your loan following the RBI raising the repo rate on Friday by another 50 basis points for lift it above the pre-pandemic level of 5.4. percent.
With the central bank raising interest rates by 1.4 percentage points in three tranches in as many months, banks and other financial institutions have no choice but to align themselves with the RBI to control inflation and increase borrowing rates for consumers. After the previous two rate hikes by the RBI, banks have already raised loan interest rates significantly over the past two months.

At its last monetary policy meeting, the RBI decided to raise the repo rate again by 50 basis points to 5.4%. Consequently, the reverse repo rate also increased to 3.85%. Most borrowers, whether new or existing (except fixed rate) such as home loan borrowers, will be required to pay increased EMIs in the coming days.

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“The rise in the repo rate coupled with inflation will hit new and existing borrowers hard. A 140 basis point increase in recent months means that borrowers who were paying around 6.8-7% interest will now pay 8.2 to 8.4% This means that even for a 20-year loan, the amount of interest to be repaid is higher than the principal.If the EMI remains constant, the duration of a 20-year loan can increase up to 8 years. lenders would not sanction this increase in duration, for sure EMIs would increase,” said Adhil Shetty, CEO of BankBazaar.

It is now essential to have a repayment plan because just using EMIs would mean a very high interest outflow, he added.

How much your EMI will increase

The new round of rate hikes started on May 04, 2022, when the RBI raised the repo rate by 40 basis points. It was the first hike in the repo rate after a gap of nearly four years. Previously, the repo rate was raised on June 6, 2018. The May 2022 hike was quickly followed by another rate hike by the central bank in its June 8 monetary policy review, where it raised the repo rate of 50 basis points. As a result, over the past 93 days, the central bank has increased the repo rate by a total of 140 basis points (50 + 90).

“The question borrowers may be asking now is whether their home loan rate is too high. One way you as a borrower can assess this is to check the premium you are paying above- above pension rate If you are a primary borrower (credit score over 750, stable income, on-time loan repayments), you can get home loan offers with a premium of around 250-275 base versus the repo rate, which is now 5.40, so based on the rates we’ve seen over the past few months, the lowest rate you can get a home loan at right now may be between 7.9 and 8.15,” Shetty noted

The range can be lower or higher depending on who you are and who you are borrowing from and if you are already in that zone you can focus on prepaying and paying a higher EMI voluntarily to control your inflated interest, did he declare. that if you are beyond this comfort zone, you can also consider refinancing with your own lender or with another that offers you better terms.

What awaits us?

The RBI hinted at housing withdrawal, it does not look like the end of the cycle. The main factor driving these rate hikes is inflation. Retail inflation in India, which is measured by the CPI, is still on the rise, with the CPI for the month of June being 7.01%.

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