The repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of India. If RBI increases the repo rate, the cost of borrowing for retail and other loans by banks also increases.
The Reserve Bank of India (RBI) announced a 50 basis point (bp) hike in the repo rate, at which the central bank lends money to commercial banks, to 5.40%. This is bad news for borrowers, especially those whose loans are tied to external benchmarks like the repo rate.
Experts say the recent rate hike is expected to push borrowers’ monthly equivalent payments (EMIs) up to a three-year high.
Why are home loans impacted by RBI’s decision?
Typically, when RBI raises the repo rate, it increases the cost of funds for banks. This means banks will have to pay more for the money they borrow from RBI. Therefore, banks pass the cost on to borrowers by raising the interest rates on their loans, making EMIs more expensive.
As a result, new and existing borrowers are witnessing an increase in their interest rates on home loans.
How much increase can we expect in mortgage rates?
The rising repo rate, coupled with inflation, will hit new and existing borrowers hard.
A 140 basis point increase in recent months means that borrowers who used to pay around 6.8-7% interest will now pay 8.2-8.4%.
“This means that even for a 20-year loan, the amount of interest to be repaid is greater than the principal,” said Adhil Shetty, CEO of BankBazaar, in an interview with CNBC-TV18.
For the uninitiated, RBI has increased the repo rate by 90 basis points over the past two policies. The first increase was around 40 basis points in May and later 50 basis points in June. Taking into account the recent hike of 50 basis points, the total increase amounts to 140 basis points.
It is important to note here that even if some banks agree to keep EMIs constant, depending on the calculation, the term of a 20-year loan can increase to up to 8 years, Shetty said. CNBC-TV18.
However, most lenders would not sanction this increased term, and certainly EMIs would increase, he added.
Shishir Baijal, Chairman and Managing Director of Knight Frank India, estimates that the rate hike will reduce the affordability of potential buyers by around 11%, i.e. a home buying ability of about 11%. worth Rs 1 crore to Rs 89 lakh now.
So what should borrowers do?
Shetty said it was essential to have a repayment plan because resorting to EMIs alone would mean an outflow of funds at very high interest rates.
“Existing variable rate borrowers with sufficient excess amounts should try to prepay their home loans and opt for the reduced tenure option to generate greater interest cost savings. Borrowers New and existing mortgage lenders with limited liquidity should opt for the mortgage saver option,” said Ratan Chaudhary – Head of Mortgage Loans, PaisaBazaar.
Under the home savings option, an overdraft account is opened in the form of a savings account or current account where the borrower can park his surpluses and withdraw them according to his financial needs. The interest component is calculated after deducting the surpluses parked in the savings/current account from the outstanding amount of the mortgage.
This would allow home loan borrowers to take advantage of prepayments without sacrificing cash.
“Existing home loan borrowers who have seen significant improvements in their credit profile after taking advantage of it should explore the possibility of saving on interest charges through the transfer of the home loan balance. Their improved credit profile may making them eligible for home loans at much lower rates than other lenders would help them reduce their EMI burden and overall interest cost,” Chaudhary added.
Will buying a home also see a drop?
According to Anuj Puri, president of the ANAROCK group, residential sales would experience a moderate decline.
“This is the third consecutive rate hike in the past two months and finally marks the end of the best low interest rate regime ever, one of the main factors that boosted home sales. across the country since the pandemic,” Puri said.
He said that this blow has been accompanied by inflationary trends in primary commodities including cement, steel, labor, etc., which have recently led to an increase in property prices. “Together, these factors – rising mortgage rates and construction costs – will impact residential sales which performed reasonably well in the first half of 2022,” Puri said.
Honeyy Katiyal, founder of Investors Clinic, also believes that increasing the repo rate would lead to a commensurate erosion of affordability, which may affect sales momentum.
What are the current mortgage rates?
Many banks raised their mortgage rates from May to July this year. The majority of lenders have tied their lending rates to the repo rate.
Here are the latest rates offered by banks on home loans:
|Banks||Starting interest rate (pa)|
|National Bank of India||7.55%|
|Union Bank of India||7.40%|
|Bank of Baroda||7.45%|
|central bank of india||7.40%|
|Bank of India||6.90%|
(These are the rates before today’s increase in benchmark interest rates by the RBI. They are subject to change in the near future.)
First post: STI