RBI MPC Meet: What to expect from RBI MPC Meet Tomorrow? With another high repo rate hike knocking at the door, home loan borrowers are likely to soon face even higher interest rates than at present. Let's find out how home loan borrowers are likely to be impacted
Home loan borrowers are likely to feel the heat of higher interest rates as the Reserve Bank of India (RBI) is widely expected to increase its key policy rate on September 30. If this happens, it will be the fourth repo rate hike in this financial year.To tame soaring inflation, the central bank of India has started raising interest rates from May 2022 after maintaining status quo on the key rates for two years. The cumulative repo rate hike between May and September till now amounts to 140 basis points. With another high repo rate hike knocking at the door, home loan borrowers are likely to soon face even higher interest rates than at present. Let's find out how home loan borrowers are likely to be impacted.
RBI MPC: RBI may hike repo rate by up to 50 basis points
Most experts are anticipating a repo rate hike tomorrow. "The writing on the wall is that given the surge of the dollar and the resurgence in inflation, the rate hike is imminent. The hike will have huge implications on borrowers," said Adhil Shetty, CEO, BankBazaar.com.
"With the MPC more confident about growth than inflation, the central bank’s hawkish policy bias to continue this week. We revise our rate hike call for the upcoming meeting to 50 basis points from 35 basis points previously, taking the repo to 5.9 per cent," Radhika Rao, Executive Director & Senior Economist at DBS Group Research.
"Inflation remains high at around 7 per cent and is unlikely to come down any time soon. This means that a rate hike is given. The quantum is what the market would be interested in. While a hike of 25-35 basis points would have signaled that the RBI is confident that the worst of inflation is over. The recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest," Madan Sabnavis, Chief Economist, Bank of Baroda.
How are home loan interest rates likely to be impacted?
All new floating-rate retail loans sanctioned by banks are usually linked to an external benchmark, which is the repo rate in most cases. Any change in the repo rate will impact the home loan interest rates. Any repo rate hike will lead to a hike in the EMIs of these loans. However, there will be an impact on other old home loans as well such as the ones linked to MCLR, base rate, and BPLR.
How much home loan interest rate hike to expect
Since May 2022, RBI has increased the repo rate by 140 basis points and the home loan interest rates have jumped on an average by 75 basis points. More than 50 per cent of the repo rate hike has been transmitted, market observers said.
According to various experts ET Wealth online spoke to, banks could increase their lending rates by 25 to 50 basis points if RBI raises the repo rate by 50 basis points on September 30.
"In the upcoming monetary policy meeting of RBI, we expect another 50 basis points hike keeping in mind the retail inflation in the economy and the Fed rate hike. Taking a cue from the previous transmission, we expect the home loan interest rates to go up by a minimum of 25 basis points," said Samantak Das, Chief Economist and Head of research and REIS, JLL, India.
Going by the trends in the last four months, only half of the rate hikes have been transmitted to borrowers. "Every increase in the repo rate this year has resulted in a half as much increase in the MCLRs of banks. For instance, the MCLR of the State Bank of India (SBI) has increased by 70 basis points in 2022 in response to the 140 bps increase in the repo rate during the year till August 2022. A further 50 basis points increase in repo rate should increase the MCLR by 25 basis points, taking the total increase due to rate hikes to 95 basis points," said Vivek Rathi, Director, Research, Knight Frank India.
As per this trend if there is a hike of 50 basis points, the MCR home loan EMI is likely to go up by 25 basis points in near future. For instance, an individual has opted for a home loan of Rs 30 lakh for a tenure of 20 years from the State Bank of India (SBI) at 6.95 per cent interest rate in April 2022. Currently, the home loan interest is 8.35 per cent and his EMI is Rs 25,751. If the bank increases the lending rate by 25 basis points after the expected repo rate hike on September 30, his home loan interest rate could climb to 8.60 per cent. His EMI would go up from Rs 25,751 to Rs 26,225 post rate hike.
EMIs may rise in case of EBR-linked home loans
As there is an option to select from various benchmarks for linking EBR the transmission will differ on the type of benchmark selected by the lender. "Since each bank has its (different) external benchmark rates, the transmission rates would differ. Based on the past trend, it is likely at least 50 per cent of the hike in repo rate will be transmitted. It’s also likely that banks might delay the transmission taking into account higher housing demand during the festive season," Das added.
However, in the case of EBR-linked home loans, the hike would be similar to repo rate hike if it is their benchmark.
For instance, for a Rs 30 lakh home loan from SBI with a tenure of 20 years at 8.35 per cent rate, an individual had to spend Rs 25,751 on EMI before the repo hike. Assuming RBI hikes repo rate by 50 basis points on September 30, the interest rate on this home loan could jump to 8.85 per cent. So, his EMI could increase to Rs 26,703.
All borrowers will not be impacted equally in near future. "The speed, and also the quantum of increase in Home loan interest rates will be governed by the respective lenders’ policies," said Raj Khosla Founder and MD, MyMoneyMantra.com.
“Home loans linked to repo rates would witness the quickest transmission of increased policy rates. For fresh home loan borrowers, the transmission of the increased policy rates would depend on the rate reset dates fixed by the banks as per their guidelines. Existing home loan borrowers would be charged higher rates from the interest reset dates set for them by the banks,” said Rathi.
Longer EMI tenure is not an option anymore
As the interest rates increase for the existing home loan borrowers, they can either hike the monthly EMI or increase the tenure of the loan. However, "we have reached a critical point for borrowers, where a higher rate cannot translate into a longer tenor anymore,” explained Shetty. “An EMI increase must kick in at some point. The lenders would like to do that in phases to keep defaults to a minimum,” he added.
"Most banks are looking at tenor increases but that seems to be reaching a limit for a lot of customers. Large banks are not seeing any option other than an EMI increase for a reasonable base of customers. Most banks have increased the loan maturity age by five years, there is no scope to increase this further," said Amit Diwan, Chief Distribution Officer , IMGC (India Mortgage Gurantee Corporation).
"With the hikes in the policy rate, the home loan interest rate is inching towards 9 per cent and this is still below the 10 per cent benchmark which was prevailing 8-9 years back," Das added.
This story originally appeared on: Muscle & Fitness - Author:Tax Cognition
