EMIs to soar: Here's how much repo rate hike will pinch home loan borrowers

RBI's repo rate hike spells bad news for those who were looking to buy a home and also for those who are paying their EMIs

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday unanimously voted to increase the benchmark policy rate by 50 basis points, thereby taking the repo rate to 4.90 per cent. This comes less than a month after a surprise rate hike by the bank in May in an off-cycle meeting.

The hike spells bad news for those who were looking to buy a home and also for those who are paying their EMIs.

Let's understand how RBI's rate hike is directly linked to your EMIs

Floating home loan interest rates of a bank have to be mandatorily linked to an external benchmark, which for most banks is the RBI repo rate. So, every time the RBI repo rate is revised, there is a direct impact on the borrower’s EMI or tenure. As the transmission of the repo rate is immediate, the borrower sees the impact on the home loan interest rate within three months. When the repo rate rises, the repo rate-linked lending rate (RLLR) also goes up, leading to an increase in the home loan interest rate for the borrower. However, instead of increasing the EMI, in most cases, the tenure of the loan is increased by banks.

Here's an example:

Assuming a loan outstanding of Rs 35 lakh for a period of 10 years, a 0.9 percentage point increase in interest rate pushes the interest burden to almost 8 per cent, keeping all other factors constant.

At 7.1 per cent (on a Rs 35 lakh) the EMI was Rs 40,818.

The total interest paid over 10 years would be Rs 13.98 lakh.

Now that the rate has increased by 90 basis points or 0.9 percentage points, to 8 per cent on a Rs 35 lakh loan amount spread over 10 years, the EMI would be Rs 42,465, and the interest paid would be Rs 15.96 lakh.

Is there a way out?

The only way to reduce the home loan EMI or interest burden is to keep pre-paying the outstanding loan amount as and when you have surplus funds. The sooner you repay the loan, the lower the cost of owning your home will be.

What about those looking to buy a new home or property?

According to property consultants, RBI's decision to hike the benchmark interest rate will make home loans costlier and affect housing sales, especially in affordable and mid-income segments.

Anarock Chairman Anuj Puri said: "The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month".

Interest rates will remain lower than during the global financial crisis of 2008 when they went as high as 12 per cent and above, he said.

"Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments," Puri pointed out.

Colliers India CEO Ramesh Nair is expecting banks to gradually pass on this rise in repo rate in the form of higher home loan rates in the coming months.

He advised homebuyers to take advantage of the prevailing home loan rates, with housing prices expected to rise.