With the retail inflation in India touching the 5% mark in June, the Reserve Bank of India increased its short term lending rate or repo rate by 25 bps or 0.25% per cent for the first time in five years. The repo rate now stands at 6.50% from the earlier 6.25%. A rise in the repo rate does not translate into happy news if you are a borrower. This is because home loans are set to become costlier. Here is why.
Before we go into how much of a brent housing loans will have to bear, let us understand why such loans ae set to become dearer. Repo rate is the rate at which, the apex bank lends money to commercial banks. With the increase in repo rate, the RBI will now charge a higher rate of interest to the commercial banks it lends to. This means, that the banks in turn will in turn , pass on the increased cost to its borrowers.
Home loans stand to bear the worst impact as borrowers usually opt for floating rate loans that are the first to adjust according to the altered interest rate and they come with the longest tenure. While a 0.25% increase does not seem like a huge quantum upfront, it has a substantial impact over a period of time.
Consider this. Mr A has taken a housing loan of Rs 60 lakhs for 20 years at the rate of 8.25%. His EMI stand at Rs 51,124 consequently. With the 0.25% rise in interest rate, his EMI jumps to Rs 52,069 in a month. You may think that this is not such a big jump. However over the tenure of 20 years, his total interest outgo goes from Rs 62.69 lakhs to Rs 64.96 lakhs, resulting in an increased cost of Rs 2.27 lakhs to Mr A. Thus as you see, even an increase of 0.25% can have a grave impact on home loan customers.
What you should do?
If you are a new borrower:
Banks have already begun hiking their MCLR or their marginal cost of funds based lending rate. This means that most home loan rates have already shot up or are slated to rise shortly. If buying property is topmost on your mind now, make sure you check out all the offers available thoroughly, before deciding upon the lender you want to go with. Do bear in mind that there is a considerable difference in rate of interest of banks and housing finance companies, thus make a prudent choice. At this stage, it is also recommended that you avail of the free credit report facility from CIBIL to ensure that your credit report is blemish free and your credit score is high. A high credit score will help you procure a loan at competitive rates.
For existing borrowers
Existing borrowers have no choice but to bear the impact of a hike in housing loan interest rate, which has either been reset already or is about to be revised shortly. Once you learn the new rate of interest as announced by your lender, use an EMI calculator to find out your total outgo at the end of the tenure. If you have a stellar credit score, as a check of your free credit report will reveal, you may even consider asking your lender to reconsider the rate of interest on your loan.
If the lender does not budge you may consider a home loan transfer from your existing bank to a new bank or a housing finance company if a better deal is available. However, do bear in mind the additional costs of transfer such as transaction fee, processing fee and the likes and assess whether you are actually saving up costs, or paying more instead.
Whatever may be the case, it is not advisable to delay your home purchase decision. The RBI has indicated that its monetary policy stance is now in the mode of withdrawal of accommodation. This means that further rate hikes cannot be ruled out in the upcoming policy reviews.
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