Home loan EMIs are likely to shoot up post RBI rate hike; here’s how you can manage your payments 

Your Equated Monthly Instalment or EMI is set to go up, as the Reserve Bank of India (RBI) has increased the repo rate by 0.40 per cent to 4.40 per cent. This means that all loans which are linked to repo rate will now become costlier including your home loan. For example, your EMI will increase by around Rs 1,200 if you have a home loan of Rs 50 lakh at the existing rate of 6.7 per cent for the tenure of 20 years. Similarly, your EMI will increase by Rs 1,800 if the home loan size is Rs 75 lakh.   

V Swaminathan, CEO, Andromeda and Apnapaisa said, “This move was on the cards as the policymakers were under immense pressure due to the rising inflation in the country and at the global level. All the loans that come under the Repo Linked Lending Rate (RLLR), especially the home loan and the Loan against Property will now cost higher and there can be a subsequent increase in other loans EMI as most of the banks have already started increasing the MCLR since the beginning of this fiscal year." 

State Bank of India recently hiked the MCLR across tenors by 10 basis points (bps). The revision in MCLR rates came into effect from April 15 increasing the rate from 6.65 per cent to 6.75 per cent for overnight, one month and three-month tenors. Meanwhile, Bank of Baroda and Axis Bank have also hiked their MCLR across tenors by 5 basis points. Housing Development Finance Corp. Ltd (HDFC) raised its benchmark retail prime lending rate (RPLR) by 5 bps, leading to an increase in home loan rates for existing customers. A basis point is one hundredth of one percentage point.   

The RBI has also increased its Cash Reserve Ratio by 50 bps to 4.5 per cent. The reason for the rise in interest rates is the jump in inflation rates, which has pushed the returns from 10-year bonds. The wholesale inflation has surged to a record high of 14.5 per cent in March 2022. Not falling behind, the retail inflation rate, which is measured by the Consumer Price Index (CPI), has also zoomed to 6.95 per cent in March 2022. 

Currently, home loans are benchmarked against MCLR and RLLR. This is because the Reserve Bank of India (RBI) in 2019 directed all banks to benchmark their new loans against external benchmarks as banks were not fully passing on the benefit of the rate cut by RBI to their borrowers. Banks were asked to benchmark all new floating rate personal or retail loans to one of the following: RBI's repo rate, Government of India 3-months Treasury bill yield published by Financial Benchmarks India Pvt. Ltd. (FBIL), 6-months Treasury bill or any other benchmark market interest rate published by the FBIL. The existing borrowers were, however, given the choice to transfer to external benchmarks or continue with their existing rates.  

How to manage the rise in EMIs?  

With an increase in home loan rates, borrowers can either increase the loan tenure to reduce the EMI burden or can make part pre-payments on their loan, to bring down the monthly instalment. “The general practice is to revise the tenor of the loan instead of the EMI. So, an increase in the interest rate would mean a longer tenor at the same EMI. This means you would need more time to close your outstanding loan. Long-term loans like home loans allow you to make prepayments. So, your best alternative is to try to prepay your loan. While pre-paying 5 per cent of your outstanding every year would be an optimal solution, even a small prepayment of one EMI per year can bring substantial savings,” says Adhil Shetty, CEO, BankBazaar.com.  

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