RBI's repo rate hike: You might pay Rs 59 lakh more as interest on your Rs 50 lakh home loan; Here’s how

The Reserve Bank of India (RBI) today increased the repo rate, the rate at which commercial banks borrow from RBI, by 0.50 per cent, or 50 basis points. The central bank has also lowered GDP estimate for FY23 from 7.2 to 7 per cent while keeping the inflation projection unchanged for FY23 at 6.7 per cent. The Monetary Policy Committee (MPC) meeting started on September 28 and concluded today on Friday, September 30, 2022 with 5 out of six members voting for the rate hike.

With the rise in repo rate, floating rate loans, such as your car, personal and home loans, are all set to become costlier, as when the cost of borrowing increases for banks it automatically leads to a proportionate rise in lending rates for borrowers.

“The writing on the wall was clear. A 50 bps hike by the RBI was expected as the apex bank is taking all measures steps to fight inflation. As the repo has increased by 190 bps to 5.90, it will have a huge impact on borrowers - both new and existing. Existing borrowers will see their EMIs or loan tenors increase with the latest rate hike,” says Adhil Shetty, CEO, BankBazaar.com

Let's look at the impact of rate hike since May on your home loan

Home loan

With the increase in repo rate to 5.90 per cent, home loan borrowers will have two options now. Either to increase their tenure, which is a default option, or increase the EMI. For example, an existing home loan borrower, with an outstanding principal of Rs 50 lakh and tenure of 20 years at 8.12 per cent interest, will have the loan period further extended by two years and 3 months at a new rate of 8.62 per cent  Not just the burden of increased tenure, the borrower will also bear the brunt of extra interest outgo of Rs 11 lakh.

But if one considers the rate hike of 1.90 per cent over the period of just 5 months then your interest outgo has increased by a whooping 59 lakh over the period of 20 years.

If one opts for higher EMI then the repayment schedule will remain the same. 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 43,771 compared to the earlier EMI of Rs 37,929, difference of Rs 5,800 considering the rate hike of 1.9 per cent since May.

What to do? “I reiterate my earlier advice that borrowers can prioritise pre-payments to control their loan interest. This will help them in reducing their loan tenors and EMIs. Economies across the globe are grappling with recessionary trends. A time like this calls for people to calibrate their finances to adjust for these difficulties. For example, if you took a home loan at 7 percent for 20 years and assuming your rate goes to 8.9 percent after 3 months, you had 237 EMIs left but now it could theoretically go to 410 months assuming the same EMI. Assuming a bigger EMI, the tenor extension will be smaller. But at 410 months, your loan is 173 months or nearly 14.5 years longer. At this stage, if you made an immediate pre-payment 17 times your EMI, your tenor reduces to 236 months. Four pre-payments of 4.5 times EMI once every 12 months has roughly the same effect in reducing your tenor,” says Shetty.

With the rise in repo rate, your car loan will also go up. However, it varies in the case of personal loans as public sector banks (PSBs) usually offer personal loans at floating interest rates whereas most private banks offer personal loans at fixed interest rates. Hence, if your personal loans are based on floating rates then it will also go up in tune with other EMIs.

Also read: RBI hikes repo rate by 50 bps to 5.90%; home, car loans to be impacted

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