The rising inflation in India has forced the Reserve Bank of India (RBI) to tighten the monetary policy leading to a hike in interest rates on loans, including home loans. Many banks raised interest rates by an average 0.75 percent.
The move would increase repayment by a minimum of about Rs 1.25 lakhs on a Rs 10-lakh loan. On a 20-year loan, borrowers have to pay over Rs 500 more every month in EMI on a loan of Rs 10 lakhs.
The central bank has also raised the cash reserve ratio (CRR) - the percentage of a bank's deposits which it must keep with the central bank - by 25 basis points from the existing 8.75 percent . This will come into effect from August 30.
Many banks have already announced rate hikes during the last fortnight. Some others are expected to follow suit. Banks are hiking their retail prime lending rates on which the adjustable home loans are benchmarked. As the cost of lending for banks goes up, both deposit and lending rates will be hiked.
This decision to raise the rates has been taken to tackle rising inflation. The rate hikes will curb liquidity in the system. With cash conditions tightening, home, consumer and other loan rates are likely to go up. The hikes will lead to tightening of money supply, forcing banks to raise lending and deposit rates.
In the past, interest rates were as high as 18 per cent, and then fell to eight percent over a period of time. So, over a long term, borrowers will see rates coming down again. The high interest rate scenario is a temporary phase and the rates are expected to ease out in the medium to long term.
Effect on borrowers:
At 11.75 percent floating rate, the EMI is estimated to work out to around Rs 21,675 per month, up Rs 1,031 from Rs 20,644 at a rate of 11 percent . This would result in an overall additional burden of close to Rs 2.50 lakhs over a 20-year period. A 0.75 percentage point hike will mean - on a floating rate home loan - an additional EMI of Rs 51 per lakh, on a 20-year term.
In case of floating rate loans, if the interest rate increases, usually the EMI remains the same but the banks increase the tenure of the loan. In case the interest rate decreases, the EMI remains the same and the tenure of the loan is reduced.
Alternatively, by continuing to pay the same EMI, a borrower can have the option of drawing an additional amount, keeping the loan period unchanged.
For fixed interest rate borrowers , there is no impact, as they are in any case totally insulated from interest rate movements, either upwards or downwards. The recent successive increases in interest rates by banks have led to increases in EMIs as well. Home loan borrowers now have to pay out higher EMIs.
The Reserve Bank of India recently increased its repo rate (the rate at which it lends to commercial banks) by 0.5 percent, and the cash reserve ratio (the minimum cash a bank has to set aside against deposits) by 0.25 percent. This has forced banks to raise the interest rates, including those on floating home loans.
In the case of a 20-year loan, a 25 basis points hike will mean the EMI going up by Rs 17 for every Rs 1 lakh loan. In case of a 50 basis points hike, it will be Rs 35 and in case of 75 basis points hike, the EMI will increase by Rs 51.
Similarly, if it is a 15-year loan, a 25 basis points hike will push up EMIs by Rs 16 a month, a 50 basis points hike by Rs 33, and a 75 basis points hike by Rs 50.
It is advisable to change EMIs rather than opting to increase the tenure as you may end up paying a whole lot more. So the best option, in these conditions, for an individual , is to opt for an increased EMI and maintain the same tenure. |
