What is the Impact of Repo Rate Hike on Home loan Borrowers (Existing & New)?

(Updated February 2023) – The RBI increased the Repo rate (again, but not surprisingly) by 25 basis points amid concerns about inflation. And while banks are slow to increase the FD rates, they are quite quick to pass on the increase in repo rates to borrowers.

This increase will also have a direct impact on home loan customers and borrowers in general. Just to put it very simply, here is how an increase in repo rates impacts home loan borrowers –

An increase in the repo rate will make it costlier for banks to borrow funds from RBI. As a result, they will then have access to costlier funds and as a result, it will lead to an increase in home loan interest rates. The exact opposite happens when repo rates are reduced. That is, the home loan rates start trending downwards. If you are a bit curious, then here is the history of repo rates in India.

Now coming back, this new hike by RBI will also push up home loan interest rates – which have moved from 6-6.5% to almost 8.5-9% now in a matter of few months! So home loans are getting costlier and will further cost more if RBI continues to hike repo rates in its fight against inflation.

So can the home loan rates move up to double digits at 10%?

Quite possible but no one can predict. Let’s see how inflation does in the coming months and if it doesn’t come down, then RBI has made it clear that it will not shy away from increasing repo rates further (and with it, home loan rates will rise too).

What Should EXISTING Home Loan Borrowers Do Now?

If you already have a floating-rate home loan, then your interest rates will increase further (as they would have increased till now over the last few months).

The actual impact on your home loan EMI will depend mainly upon the remaining tenure of the loan. The higher your remaining home loan tenure, the higher would be the increase in your EMI. And that is simply because of how home loan maths works. (Sidenote – Did you know that the home loan principal gets repaid slowly initially in the loan tenure?)

So if you took a loan of 20 years in 2021, then the rise in your EMIs will be higher than for those borrowers who took a 20-year loan in say 2017.

Let’s take a simple example to understand how EMIs will increase actually.

Suppose you took a Rs 60 lakh home loan for 20 years in early 2022 at 7.0% and if your home loan rates increases to 9.25% now, then your monthly EMI would go up from Rs 46,516 to Rs 54,774 if you want to repay the loan within the original tenure. So this is an increase of almost 18% in your monthly EMIs. But if you had taken a home loan for 30 years, then your EMI increase would have been much more than 18%.

When they increase rates of existing loans, the banks generally adjust the loan by extending the loan tenure so that the monthly EMI remains unchanged for the borrower. The other option is to ask your bank to let the EMI increase and allow tenure to remain as it was originally. This would result in higher EMI outgo and might strain your budget, but it will help you save several lakh rupees in total interest cost over the loan tenure.

Here is what existing home loan customers can do –

  • If your home loan rate has increased, then if you have a monthly surplus, then choose to have your EMI increased rather than tenure extended. This is the preferred option financially speaking.
  • But if you don’t have any more surplus and are already constrained cashflow-wise, then you have no option but to go for an increase in tenure to keep the EMIs same. But it will cost you more in higher interest costs.
  • If you don’t want to increase the EMI but have some one-time surplus available at hand, then you can also make a partial prepayment to bring down the principal. This can help you keep the same EMI over the rest of the loan duration without increasing the tenure.

Related Reading 1 – Prepayment Examples to Quickly Clear Rs 50 lakh home loan

Related Reading 2 – Best Time to Prepay Home loans

What Should NEW Home Loan Borrowers Do Now?

You start from a clean slate and high-interest rates (compared to those who started in the last few years). But you can’t control the interest rates. You can only assess the impact and see how you can manage things. In any case, if you are planning to take a home loan and buy a house (doesn’t matter whether it is ready-to-move or under-construction), then you will have to accept a significantly higher EMI amount than just a few months ago.

So how much Will EMIs Increase for new borrowers?

Let’s take a simple example comparing old and new rates – Suppose you had decided to buy a house (and take a home loan of Rs 50 lakh) when home loan rates were 6.5%. But in just a few months while you were house-hunting, the rates have shot up to almost 9%.

Here is how it impacts your loan maths –

  • At 6.5%, your monthly EMI would have been Rs 37,279. But now if you borrow at 9%, the EMI will be a much higher Rs 44,986. An increase of about 20.6% in monthly EMI.
  • At 6.5%, your total interest paid for 20 years would have been Rs 39-40 lakh. But now if you borrow at 9%, it will be a much higher Rs 57-58 lakh. An increase of almost  46% in total interest outgo (assuming constant rates in both cases).

Related Reading 3 – Use this Free Home Loan EMI Calculator (Excel) download that you can use to try and see how home loan EMIs change with changes in tenure and interest rates.

So if you are now in a dilemma about whether to take a loan or not as EMIs have increased a bit, then one option is to make a higher downpayment and take a lower home loan amount. But while that makes a lot of sense, I would also warn you never to make the mistake and don’t use all your savings to make downpayment. Always have some money with you for emergencies and unplanned but unavoidable expenses.

What Home Loan Rates Increase more in Future (2023)?

Yes. The chances are high. The current rate hike by RBI is the sixth one within the last 9-10 months. From 4% in May 2022 to 6.50% in February 2023. RBI has also said that it will do everything it needs to control inflation. So while RBI may take a pause or slow down, chances are high that we will see further rate hikes over the next few quarters. And as and when that happens, home loan rates will increase further. How high? I don’t know. They are already touching 9% for borrowers with reasonably good credit scores. So even 10% or more cannot be ruled out.

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