Every time the RBI raises the repo rate, the banks pass on the hike to consumers in the form of a higher rate of interest. The borrowers in turn are left with the option of extending the tenure of their loans or increasing the payout of the equated monthly installments.
Vivek Iyer, National Leader, Grant Thornton Bharat says in an increasing interest rate scenario, home loan EMIs which are usually based on floating interest rates, will increase. This will stress the budgets of home loan owners and impact their discretionary spends, he says.
When will home loan EMIs peak?
According to Adhil Shetty, CEO of BankBazaar.com, borrowers who had taken home loans recently at rock-bottom rates need to be cautious about their rate hikes. Mathematically, a 20-year loan taken at 6.50% with a constant EMI can become a 33-year one if the rate goes to 8.40%, he tells TOI.
In the table below, BankBazaar.com illustrates what has been the likely impact of the 190 basis points repo rate hike so far this year on Rs 50 lakh home loan EMIs. Additionally it looks at the possible hike in EMI if the repo rate is raised by another 50 basis points this fiscal year.
For home loans with constant EMIs, the tenure of the loan may be extended, as seen in the table below. However, if the rate goes from 6.50 to 8.90, the loan tenure will spill beyond the maximum acceptable tenure which is often 360 months, notes BankBazaar.com.
At that point, the borrower’s EMI will also go up because theoretically, the rate hike would create an absurd situation where a 20-year loan can become a 60-year loan. Hence in the table above, the tenure has been capped at 360 months.
Vivek Iyer of Grant Thornton Bharat says that where the home loan rates have been linked to external benchmark rates, the rate hike has already been passed on. However, where home loan rates are tagged to an older interest rate regime such as MCLR, base rate or BPLR, the rate hikes will be passed on to the customers with a delay. “It is less about the tenure of the loan and more about how the home loan interest rates for the loans are linked to the repo rate,” Iyer tells TOI.
In a recent survey of economists and experts done by Times of India Online, a majority expect the central bank to raise repo rate by another 30 to 60 basis points this financial year. The trajectory of the repo rate cycle is dependent not just on inflation coming under control, but also on the rate hikes by the US Federal Reserve.
Nevertheless, the broad consensus amongst the experts surveyed is that the rate hike cycle will likely end soon. This means your home loan EMIs may be peaking soon!
What should borrowers do?
Atul Monga, CEO of BASIC Home Loan says borrowers who already feel the pinch of a hike always have the option to extend their tenure period to keep the EMIs constant. “By doing this, the total interest paid by the borrower would be higher, but the EMIs would remain the same. This would give the borrower some breathing room, in terms of their monthly cash flow,” he explains.
Adhil Shetty of BankBazaar.com advises that borrowers should pre-pay systematically to deal with their rising interest burden. “Pre-paying 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,” he tells TOI. “The objective should be to pay off any loan in its intended time-frame and not let the interest balloon out of control,” he adds.
Atul Monga is of the view that despite rate hikes, home loan interest rates are still relatively low when compared to pre-pandemic levels. “One of the main reasons for this is that the RBI has asked banks to adopt a lenient approach towards borrowers who are facing difficulties in repaying their loans due to the post- pandemic stress,” he tells TOI. “This is good news for borrowers, as it means that they will still be able to afford their repayments,” he explains.
As per RBI data on deployment of bank credit, housing loans outstanding in September 2022 grew by 7.2% over March 2022. Adhil Shetty of BankBazaar.com points out that this segment grew nearly twice as fast over the preceding six months. For the same time-frame car loans grew at nearly 12%, compared to the 1.8% in the preceding six months.
“Interest rate movements are cyclic. Individual readiness is key to borrowing. Eligible borrowers will be able to avail financing regardless of interest rates,” Shetty concludes.