RBI hiked the repo rate by 25 basis points. The repo rate has gone up from 6.25% to 6.5%. This is the first time in nearly 5 years that RBI has gone for a back-to-back rate hike. The last time RBI had done something like this? It was way back in October 2013.
Repo rate is the rate at which RBI lends money to banks. A hike in the repo rate is bad news for borrowers. Banks are likely to increase interest rates on loans when repo rates are hiked.
When RBI lowers the repo rate, commercial banks are expected to pass on the benefit of lower interest rates to borrowers. When repo rates are hiked, banks raise interest rates making home loans, car loans and personal loans costly.
Will this rate hike make home loans costly? Let’s find out. Want to know more on home loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
Banks offer home loans and car loans to you and other borrowers at floating interest rates. When repo rates are hiked, home loan EMIs and car loan EMIs are likely to go up as these loans are typically issued on a floating rate basis.
So why did RBI hike repo rates? The main focus of RBI is taming inflation. In the recent past, inflation has been accelerating. RBI Governor Urjit Patel said the main reason for the 25 basis points hike in repo rate was to maintain the 4% CPI target. International Crude oil prices are soaring in recent times and the retail prices of petrol and diesel have been hiked.
This is fueling domestic inflation in the country. The Governments larger than usual hike in MSP (Minimum Support Price) is impacting food inflation causing it to soar. There’s a trade war brewing between the US and the rest of the World. As Nations try to protect domestic industries by imposing tariff barriers, imports become costly. India could see prices of imported goods rise affecting the economy. All this has forced RBI to hike repo rates.
The RBI has stated that all home loans disbursed on or after April 1st 2016 must be linked to MCLR. (Marginal Cost of funds Based Lending Rate). MCLR is the minimum interest rate of the bank below which it cannot lend.
When repo rate is hiked, banks generally increase MCLR. The largest lender in India, SBI, is the first to hike or cut interest rates in line with repo rate hike or cut by the RBI. After RBI hiked the repo rate by 25 basis points, Union Bank of India, Karnataka Bank and Kotak Mahindra Bank hiked MCLR by 5-10 basis points. So, banks are hiking MCLR making home loans costly.
Your existing home loan is linked to MCLR. You could see home loan interest rates rise as banks hike MCLR. But, you are lucky? Your home loan EMIs will not rise till the reset date. On a floating rate home loan, banks have a 6-month or a 1-year MCLR as a benchmark. If you choose the 6-month MCLR, home loan rates will be reset every 6 months.
The bank will not hike home loan EMIs at the reset date. It will extend the tenure of the home loan keeping home loan EMIs constant. A long tenure on the home loan increases interest costs for you and other borrowers.
If you are an existing borrower and find home loan rates going up on the reset date, it’s wise to compare interest rates offered by other lenders and check if you can save a lot in interest, by opting for home loan balance transfer. Try negotiating with your bank for lower interest on the home loan. If the bank refuses, opt for balance transfer.
See also: No Cost EMI
If you are planning to avail a home loan and buy a house, there’s bad news. Banks have hiked MCLR and this means higher interest rates on home loans. You may be tempted to postpone the purchase of the dream home, but if you have locked-on an excellent property, it’s wise to avail a home loan and make the purchase in spite of higher interest on the home loan. Properties in good locations appreciate with time and you will see a good return on investment.
Let’s say the current interest rate on a home loan of Rs 30 Lakhs, for tenure of 20 years, is 8.5% a year. If the bank hikes interest rate to 8.75%, you will see EMIs go up by Rs 476.
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