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How the RBI’s Moves to Control Inflation is Sending Home Loan EMIs North

How the RBI’s Moves to Control Inflation is Sending Home Loan EMIs North

The recent repo rate hike by the RBI will bump up home loan EMIs again, bringing more pain for borrowers

Following a repo rate hike of 50 basis points (bps) by the Reserve Bank of India (RBI) at its recent monetary policy meeting, banks have started passing on the burden to home loan borrowers. Following a repo rate hike of 50 basis points (bps) by the Reserve Bank of India (RBI) at its recent monetary policy meeting, banks have started passing on the burden to home loan borrowers.

Get ready to pay more for your dream home. Following a repo rate hike of 50 basis points (bps) by the Reserve Bank of India (RBI) at its recent monetary policy meeting, banks have started passing on the burden to home loan borrowers. Lenders such as ICICI Bank, Bank of Baroda and Canara Bank have already increased interest rates on their home loans, while others are expected to follow suit.

“The RBI has hiked the repo rate for the third time in a row, as the government tries to control inflationary pressures. In the past three months, the repo rate has increased by 140 bps to 5.4 per cent and is [now] hovering above the pre-pandemic levels,” says Ramesh Nair, CEO, India and Managing Director (Market Development), Asia, of Colliers. “Domestic economic activities remain resilient despite the challenging global financial and geopolitical environment, leading to the withdrawal of the accommodative stance by the RBI,” he adds.

The higher repo rate means more pain for home loan borrowers as it will lead to either longer tenures or higher EMIs. Banks generally increase the tenure of a loan while keeping the EMI outgo the same. For example, an existing home loan borrower with an outstanding principal of Rs 50 lakh and a tenure of 20 years at 7.65 per cent interest will have the loan period extended by two years at the 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. The other option is to pay a higher EMI and not increase the duration of the loan. On a loan of Rs 50 lakh for a tenure of 20 years, borrowers will have to pay a revised EMI of Rs 42,289 compared to the earlier EMI of Rs 40,739.

Experts say higher lending rates could dampen the demand for home loans, as EMIs will go up for both existing as well as new borrowers. “Over the last year, the housing sector has seen a recovery in demand across segments, and the higher home loan rates could dent homebuyers’ sentiment, especially in the affordable to mid category. However, we do not see a significant impact on the high-end- and luxury segments due to the higher home loan rates,” says Nair.

Even on the corporate side, hardening bond yields may push companies to borrow from banks to expand their business, as market borrowings are going to get costlier. This is because corporate bond spreads over the 10-year benchmark government securities have widened in the past few months.

For borrowers, there seems to be no immediate relief from the pain.

 

@teena_kaushal