Your Home loans, car loans will cost more: Here's how to manage EMIs

New Delhi : It’s first time in four and half years that the Reserve Bank of India has increased the repo rate by 25 bps to 6.25% in June 6 monetary policy meeting. Market analysts were, however, expecting a status quo on interest rates in the RBI’s bimonthly monetary policy meet. However, there was a consensus on a rate hike in the apex bank’s August monetary policy.

With this sudden change, all types of loans including home loan, personal loan and car loan will cost more now. A majority of banks and housing finance companies (HFCs) had already hiked their marginal cost of funds based lending rates (MCLR) recently, ahead of the RBI policy. For instance, banks and HFCs such as the State Bank of India, HDFC, ICICI Bank, PNB, Bank of Baroda, UBI, and Kotak Mahindra Bank have increased their MCLR ranging from 5 bps to 20 bps. 

The maximum impact of these hikes will be on the home loan borrowers as home loans are taken for a longer period. Financial experts believe that as home loans are usually pegged to 1, 2 or 3 year MCLR, they are set to cost more with the upward revision in MCLR. 

Here is how the increase in lending rates will increase your EMIs

For Suppose, Kolkata-based Sujoy Sen is looking for a home loan of Rs 50 lakh for buying a house of Rs 60 lakh. If he takes a housing loan of Rs 50 lakh at 8.50% interest, this would imply an EMI of Rs 43,391. Over 20 years, Mr Sen would be paying Rs 54,13,878 as interest. A 25 bps increase in the interest rate would increase the EMI to Rs 44,185 and the total interest paid to Rs 56,04,529. A 50 bps rate hike, on the other hand, would increase the EMI to Rs 44,986 and the total interest payable to Rs 57,96,712. That’s Rs 1,90,651 more in case of a 25 bps rate increase and Rs 3,82,834 more in case of a 50 bps rate hike.

So, what should home loan borrowers do now?

If home loan rates are increased by banks and HFCs sooner or later, the existing home loan borrowers if they are on MCLR will continue to repay their loans at older interest rates till their next loan reset dates.

“Once they cross their reset date, they should compare the new lending rate with those offered by other banks and housing finance companies and calculate the potential savings, if any, on exercising the home loan balance transfer option. If the savings are substantial, then they should approach their loan sanctioning branch to negotiate a lower rate or opt for a home loan balance transfer, if the branch refuses to renegotiate the interest rate,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.