In a major setback for home loan borrowers, the RBI has increased the repo rate second time in two months from 6 to 6.50% creating more woes for home buyers. Yesterday in its bi-monthly monetary policy review, the RBI has announced a 25 basis points (bps) hike in the repo rate. The central banking institution has also increased the reverse repo rate, which now stands at 6.25 %.
Effect on existing home buyers EMI due to increase in Repo Rate
A repo rate is a rate at which RBI lends money to the banks. So, a hike in the repo rate will hit directly to the loan borrowers as most of the commercial banks pass on this increase in pressure to them. For example, when RBI decreases repo rate, banks mostly pass on the benefit to its customers. However, the complete decision of hike and cut comes from State Bank of India which is also the country’s largest lender.
So, this time as the RBI increases the repo rate, banks’ marginal cost based lending rate (MCLR) is also all set to go up. Since the start of the year, many banks have been increasing their MCLR. As per the RBI’s directive, all loans including home loans disbursed on or after April 1, 2016, should be linked to MCLR. All the banks are free to decide whether to charge additional markup over and above MCLR or not. However, the lending rate cannot be below the MCLR.
So, it’s quite obvious that when the repo rate is increasing, EMI will also get impacted.
Impact on home loans linked to MCLR:
According to home loan expert, if the home loan of the existing borrowers is linked MCLR, then the hike in EMI will be felt by them when the reset date of home loan arrives. On the reset date, the future EMIs will be calculated based on the MCLR effective on that date. As told earlier, banks have full freedom to increase the MCLR at any point of time. So, it’s important that an existing loan borrower renegotiate the new rates with banks. However, if they refuse to reduce the rates, they should opt for a home loan balance transfer.
Impact on home loans linked to base rate:
Another loan expert says that if an individual’s home loan is linked to base rate, they are going to be affected worst. For example, SBI has recently hiked base rate by 25 basis points effectively from July 1, 2018. After this hike, their new base rate is 8.95 percent.
Thus, it’s an advice for such borrowers that if the home loan is linked to the base rate, they should immediately shift to an MCLR based loan.
Effect on New home loan borrowers
While existing loan borrowers are already taking a step, new home buyers who are thinking to take loan must take an immediate step soon. Most of the top banks including SBI have already increased their MCLR before the monetary policy committee meeting. Some other banks are planning to increase the rates after the MPC meeting.
Loan expert advice new loan borrowers that before zeroing on any bank they must do an extensive research on the lending rates as it differs from bank to bank. Also, the loan borrowers have the option to consider the Pradhan Mantri Awas Yojana (PMAY) scheme, which is a credit-linked interest subsidy scheme. Here loans are offered ion the basis of income level. The deadline to avail the benefit under this scheme is March 31, 2019.