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Home loan: what is the cost of additional interest after RBI’s repo rate hike?

After the surprise RBI repo rate hike of 0.4%, the cost of borrowing rose. In fact, many banks have already increased their lending rates for both new and existing borrowers. What remains to be seen is how much of the rise in rates will occur in the coming months, thus pushing the cost of borrowing even higher. It is widely expected that the RBI may opt for further hikes in the repo rate of up to 0.75% or more in the coming months.

The immediate impact of rising RBI repo rates is on retail loans such as home loans which are linked to the bank’s external benchmark. Most banks have tied their lending rates to the RBI repo rate and hence the impact is immediate for borrowers.

For all borrowers with RLLR loans, the impact on home lending can be seen primarily within three months as banks redefine loan terms with the borrower.

On a 15-year home loan, a 0.4% increase in the home loan interest rate raises the EMI by 2.5%. Assuming an outstanding loan of Rs 35 lakh, a 0.4% increase in the interest rate causes the interest burden to increase by almost 6.47% (about Rs 1.42 lakh), maintaining all other constant factors.

At 7.1% (on Rs 35 lakh)

EMI – Rs 31,655

Interest paid – Rs 21,97,898

If the rate increases by 0.4%, then to 7.5% (on a Rs 35 lakh)

EMI – Rs 32,445

Interest paid – Rs 23,40,178

If the repo rate is further increased, the EMI will increase. If the increase in the interest rate of the home loan is 0.5% and 1%, the EMI increases to 3.1% and 6.2% respectively.

In general, banks keep the EMI constant but increase the term of the loan. Therefore, for most RLLR loan borrowers, the rise in the RBI repo rate means an increase in the term of the loan, which impacts the total interest cost. In a home loan, the longer the term of the loan, the higher the interest cost and vice versa.

In contrast, MCLR borrowers may not immediately feel the pinch of a repo rate hike. Even though the hike in the RBI repo rate drives up the cost of funds for the banks, they can only revise the EMI or mandate when the reset date arrives. The reset date for MCLR related loans is usually 12 months while for a few banks it is even at 6 month intervals. SBI has already revised its 1-year MCLR upwards by 0.10% effective May 15, 2022.

Overall, in a flexible home loan, the interest rate will continue to rise and fall. The only way to reduce the EMI or home loan interest charge is to keep replaying the outstanding loan amount as you have excess funds. The sooner you pay off the loan, the lower the cost of owning your home will be.


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