Minimise The Impact Of Repo Rate Hike On Your Home Loan

Mon, 05/23/2022 - 04:40

Author: Ritika Gondhalekar


The current hike in repo rate of 40 bps has homeowners worried. But, industry experts believe that the hike will not have a major financial impact if you plan it right. Here’s how

When exam dates are announced, it’s natural for students to get tensed. Despite knowing that one has studied well, a fear settles in. Similarly, when the Reserve Bank of India (RBI) hiked the repo rate by 40 basis points (bps) two weeks ago, taking it up to 4.40 per cent, homebuyers panicked.

However, before you worry, here are a few things that you should check:

Is your home loan on a fixed interest rate or floating interest rate?

If you have a floating interest rate, then, what is the reset date?

While fixed rate of interest does not fluctuate under any circumstances, floating rate of interest changes on the reset date depending on the market conditions. “For instance, you have taken a home loan in July 2019 at the rate of 6.70 per cent and the RBI increases the repo rate by 40 bps in March 2020; and your reset date is June 15 of each year. In this situation, the new interest rate of 7.10 per cent will not be applicable to you immediately from April 2020, but will be applied from June 15, 2020, thus, giving you some time to factor in the additional EMI payout and make necessary monetary arrangements,” says Abhishikta Munjal, chief risk officer, IIFL Home Loan.

Implications of the current rate hike

“As repo rate rises, home loan interest rates automatically increase. But because a home loan is a long-term loan, the interest rates are expected to fluctuate at regular intervals. But this would affect only those with a floating interest rate; if you have a fixed interest rate, then these fluctuations will not affect your EMI payouts. However, if you are looking to invest in a home for self-use, this is still a favourable rate. After all, we have seen home loan interest rates touch 10 to 12 per cent less than a decade ago. Today, interest rates are still at their lowest, so a minor increase will not have an impact on the demand for home loans. Also, home loan borrowers are eligible for tax incentives on the interest and principal repayment of home loans. This reduces the effective interest rate on the home loans,” explains an industry insider.

Will your EMIs increase?

“When the rate increases, a borrower has two options to restructure this increased repayment cost — either increase the EMI amount or increase the loan tenure. If you explicitly don’t opt for EMI amount revision, in most cases, the lender would increase your loan tenure without you even knowing about it,” says Pranjal Kamra, CEO, Finology Ventures and founder, Recipe, a digital platform providing financial education. An increase in the loan tenure automatically increases your total interest outflow.

Repo rate hike

Image Credit: Times Property

Let’s take an example of housing loan with 20 years of tenure and an existing interest rate of 6.75 per cent and analyse the rate revision. Assuming an increase of 40 bps on repo rate, the interest rate now stands at 7.15 per cent. Thus, from the mentioned example and calculations, one can infer that just by absorbing the monthly rate hike and by not increasing the loan tenure, you can save up to Rs 2,38,038, Rs 3,17,550 and Rs 3,96,804 on your existing home loan of Rs 30 lakh, Rs 40 lakh, and Rs 50 lakh respectively.

House prices are inching up

With the surge in repo rates, the interest at which the commercial banks lend to the builders also increases, thus affecting the final selling price. On the flip side, one needs to understand that RBI increases the repo rate to regulate the cash flow in the market and arrest inflation. “Buyers will feel the pinch for a while as the construction costs are on the rise because of increase in costs of raw materials and now the interest rates,” explains the industry insider.

The spread makes a difference

Home loan rates linked to repo rate usually comprise of repo rate + the spread. A spread is a rate that a borrower pays above the repo rate, which is decided by his/her respective lender on factors such as loan amount, credit score, loan duration, type of loan, etc. For instance, if your lender has applied a spread of one per cent and the interest rate applied is six per cent, then the total interest rate applicable to you becomes seven per cent. “In many cases, the lenders do not increase the spread rate immediately as it causes a huge drop in demand for home loans, thus affecting their business,” says the industry insider.

Source: Times Property