Existing and new retail borrowers will now pay higher equivalent monthly installments (EMI) for their mortgages and home loans, after the Reserve Bank of India (RBI) raised the repo rate by 40 basis points (bps) on Wednesday .
Auto loans will also become more expensive for new borrowers. However, those who have taken out a fixed rate loan will be spared.
For any existing contractual deposits such as term bank deposits or recurring deposits, the rate will not change. However, if banks raise interest rates on new deposits, savers will gain.
Impact on mortgage borrowers
The proportion of variable rate loans linked to external benchmarks, such as the repo rate, was around 40% in December last year. Right now, more than two dozen lenders are offering home loans at less than 7%, but the days of rates below 7% may be coming to an end.
With rising repo rates, variable rate loans will become more expensive and all new loans will likely be more expensive.
On a home loan of Rs 50 lakh for 20 years at 7%, the EMI today is Rs 38,765 and the interest payment for the full term would be Rs 43.03 lakh.
If the rate increases to 7.4%, the EMI will increase to Rs 39,974 and the total interest payment for the full term will increase to Rs 45.93 lakh. In other words, the EMI will increase by Rs 1,209.
Adhil Shetty, CEO of BankBazaar.com, said that if a borrower has taken out a variable rate loan, the EMI may be fixed for the term, but the term itself will increase with the rise. “To cope with this increase, you can refinance at a lower rate, increase your EMIs and make regular prepayments,” he explains.
Impact on other loans
Personal and auto loans usually come with fixed rates. For those who have already taken out these loans, there is nothing to worry about as the EMIs and interest rates would remain the same. However, variable rate loans will become more expensive, as will new loans.
For a car loan of Rs 4 lakh for 5 years at 7.5%, the EMI is now Rs 8,015 and the total interest payment is Rs 80,911. If the rate rises to 7.9%, the EMI will increase to Rs 8,091 and total interest payment will go up to 85,486.
Impact on term deposits
Deposit rates are decided by banks’ ALM committees after taking into account the existing deposit base, fund requirements, maturities of requirements and existing loans, as well as prevailing market rates. . With the rise in the repo rate, bank deposit rates could also rise.
Typically, when interest rates rise, deposit rates for short and medium durations rise initially, followed by long-term deposits. Joydeep Sen, a fixed income expert, says the rate hike by the RBI would lead to higher deposit rates. “But any meaningful transmission of higher deposit rates will take time because banks today have excess liquidity,” he said.