Higher EMI, longer tenure: RBI repo rate hike means home loan pain for borrowers

With the increase in the key policy rate by 50 basis points your home loan EMIs are set to go up. In a decision taken today by the Reserve Bank of India during its Monetary Policy Committee (MPC) meeting that started on August 4 and concluded today, Shaktikanta Das, governor of the central bank, announced the increase in repo rate by 50 basis points to 5.40 per cent. Repo rate is the rate at which the banks borrows from RBI. 

“Given the need to tame inflation, the RBI decision to increase the repo rate by 50bps is on expected lines. With this third consecutive hike in the repo rate, we are now back to pre-pandemic levels, highest since August 2019,” says Amit Goyal, CEO, India Sotheby’s International Realty.

Goyal adds, “Home loan rates are now expected to settle around 8 per cent per annum, which can put a short-term psychological dent on the demand for the mid and affordable housing segment, but we won't see that continuing for long. We are still in the comfort zone of a single-digit rate. With pent-up demand for housing post-COVID, strong economic growth and a steady job market, we expect the demand continue in India's residential housing segment, especially in the top 6 cities, where office leasing and absorption have been strong.”

V Swaminathan, Executive Chairman, Andromeda loans and Apnapaisa agrees, “With this repo rate hike of 50 bps, we are seeing the highest rates that existed pre-pandemic during 2019. This lending rate calibration by the RBI could signal a downward trend in borrowers looking for home loans, as both new and existing home loan EMIs are set to go up, ushering in a wait-and-watch attitude among new homebuyers.”

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Impact on home loan borrowers

The higher repo rate of 5.4 per cent will lead to a longer tenure or higher EMI for home loan borrowers. The default option for banks is to increase the tenure of a loan in a way that the EMIs remain unchanged, but the number of years for payment increases proportionately. 

For example, an existing home loan borrower, with an outstanding principal of Rs 50 lakh and tenure of 20 years at 7.65 per cent interest will have the loan period further extended by two years at a new rate of 8.15 per cent. Not just the burden of increased tenure, the borrower will also bear the brunt of extra interest outgo of Rs 10.14 lakh.

Another option is to pay a higher EMI while sticking to the ongoing repayment schedule. For this, one needs to put in a request with the lender as it is not a default option. For instance, on a loan of Rs 50 lakh for a tenure of 20 years, you will have to pay a revised EMI of Rs 42,289 compared to the earlier EMI of Rs 40,739. 

But before increasing your EMI outgo make sure that you do not exhaust all your savings, as this could pinch you in the long run.

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