Here's How Your Home Loan EMI Rose In 2022
The current fiscal has not been kind to home loan borrowers. Here's the impact of the RBI's rate hikes in the past eight months.
Since the start of 2022, the Reserve Bank of India has been engaged in a battle against inflation. Its primary weapon of choice has been interest rate hikes—a total of five increases has taken the repo rate higher by 225 basis points. Home loan borrowers in particular will feel the pinch.
Home loans, which had looked lucrative even at the end of 2021, are now significantly more expensive. In April 2022, a borrower could have potentially gotten a home loan at 7%. Those with high credit scores could have claimed an even better rate. Less than a year later, the interest on that same loan is going to change to 9.25%.
The equated monthly instalment on a 15-year, Rs 50-lakh loan taken in January this year would have been just under Rs 45,000. The total interest cost over the course of the repayment period would have been Rs 30.89 lakh. That is, if interest rates had remained unchanged.
All loans that were disbursed after Oct. 1, 2019, are based on an external benchmark-based lending rate. Most banks prefer to link their home loan rates to the RBI’s repo rate, and these lending rates are revised at least once every three months.
As a result, the borrower who took a loan in January would have seen EMI go up to Rs 46,039 in July and to Rs 50,211 in October. That is, if they decided to keep their tenor unchanged.
Banks usually prefer to increase the tenor rather than the EMI. However, with rates having increased by over 200 basis points this year, tenor increases may no longer be possible. The tenor of a 15-year loan would have to rise by as much as 74 months, or over six years, to pass through the increase in rates over the past eight months, according to Bank Bazaar.
With the latest increase of 35 basis points on Wednesday, home loans are likely to rise within the next couple of months. In the example cited, a reset in January would take the individual’s EMI to Rs 51,197. That’s a 14% increase in EMI from the start of the year and an over 22.5% increase in the interest burden over the remainder of the loan repayment period.
There is a silver lining. RBI Governor Shaktikanta Das said on Wednesday that the worst of inflation is now behind us. Although the governor stopped short of saying that terminal rates have been reached, economists do not anticipate that interest rates will rise significantly from this point.
A pause by the central bank is, therefore, on the cards. But for how long is anybody's guess.
Borrowers are advised to prepay their home loans wherever possible to reduce their interest burden, according to Adhil Shetty, chief executive officer of Bank Bazaar.