New Delhi: Home and car loan customers have suffered a major blow just ahead of the festive season, a setback clearly reflected in the disappointment visible on people’s faces. This development is expected to disrupt household budgets right before the festivities. On October 7, the Reserve Bank of India (RBI) announced a hike in the repo rate. The rate has been raised, leading to an inevitable increase in EMIs for home and car loans. Banks typically raise loan EMIs in proportion to the hike in the repo rate, a move that comes as a significant shock to customers.
Banks to raise interest rates based on loan demand.
People generally incur higher expenses during the festive season. Facing a simultaneous hike in EMIs would deal a double blow, inevitably leading to financial difficulties. While the repo rate has risen, there may be a slight delay before banks actually increase their interest rates. Banks make decisions regarding interest rate hikes after considering factors such as their deposit requirements, loan demand, and asset quality.
In any case, banks usually raise their interest rates in proportion to the repo rate hike. Simply put, if an individual has taken a home loan at an interest rate of 7.75%, a 25-basis-point increase would push the rate to 8%. Consequently, their monthly EMI would also rise.
Impact on the EMI of a ₹50 lakh home loan
For instance, consider an individual who has taken a home loan of ₹50 lakh for a tenure of 20 years at an interest rate of 7.75%. Currently, they pay a monthly EMI of ₹41,047. In this calculation, the borrower has to pay ₹48,51,383 in interest on a home loan of ₹50,00,000 over a period of 20 years. Combining the loan principal and the total interest, the total repayment amount over 20 years comes to ₹98,51,383.
Home loan EMI to rise by ₹775 per month.
With a 25-basis-point hike in the repo rate, the home loan interest rate will rise from 7.75% to 8%. Consequently, the monthly EMI will also increase, rising to ₹41,822.
This means the borrower will need to pay ₹775 more in EMI each month compared to the previous amount. This calculation assumes the interest rate remains at 8%; if the bank raises interest rates further due to future repo rate hikes, the EMI will increase even more.
It is worth noting that the RBI began raising interest rates in May 2022 to bring inflation under control. It hiked the repo rate across six consecutive monetary policy reviews, raising it from 4% to 6.5% by February 2023.
