The continued interest rate hikes on loans have left borrowers scrambling hard to repay their loans with some even ruing how their monthly budgets have gone haywire owing to the rise in the equated monthly instalments (EMIs). The rep rates hike struck after two decades of enjoying low-interest rates on loans, thus, leaving many surprised and heaving for alternate income sources to repay the loan.
The Reserve Bank of India (RBI) in its monetary policy meeting on June 08 this year hiked the repo rate again by 0.5 per cent to 4.9 per cent. This hike is steep considering how people had anticipated the RBI to go slow on its rate hikes. The last repo rate hike by 40 bps was announced on May 04, 2022. Both new and existing home loan borrowers have now to pay higher EMIs on the loans they sought.
The extent of EMI increase
The recent hike in repo rate hike has gone up to 0.9 per cent. Corresponding to the rate hike by the Central Bank, other banks and housing finance companies also announced a hike in their lending rates simultaneously. This has caused borrowers to now either pay higher EMIs or opt for a longer loan tenure.
Let us understand this with the example of a loan worth ₹100000 taken at 6.50 per cent interest for 20 years. The EMI payable would be ₹746. The EMI when payable on the same loan at 7.5 per cent interest for the same tenure would be ₹806. Now extrapolate the same to a loan worth ₹1 crore. This is important as real estate prices have shot up in the past few years with a decent housing project available at a minimum of ₹1 crore. At a 6.5 per cent interest rate, the loan taken for 20 years would attract an EMI of ₹74,557. Borrowers now repaying the same loan sought at 7.5 per cent interest, other conditions remaining the same, would now have to pay ₹80,559.
For every lakh rupees of loan sought, borrowers will now be paying an added EMI of ₹60. For every ₹1 crore of home loan taken, the extra EMI would be to the tune of ₹6000.
The interest rates on vehicle and personal loans have also gone up leaving many reeling under the burden of higher EMIs to be paid.
Anticipating more hikes
The last rate hike may not be the last in the line of repo rate hikes by the RBI. Analysts confirm how it would take a lot more than some repo rate hikes to tame the dual impact of global and domestic inflation. We believe that we are at the height of inflation though we may see prices of commodities again shooting up in future. We are yet to witness the hike in inflation as much as we may find it difficult to see the end of it. Till the inflation rate comes down to the rate of two to six per cent, the RBI may be forced to opt for interest rate hikes among implementing other inflation-controlling measures.
Does an extended loan tenure help?
Many families have complained how their monthly budgets are now way off the mark owing to the extra amount they have to dole out through EMIs every month. To mitigate the burdening effect of EMIs, many have requested the banks for an extended home loan tenure wherein they can repay the same loan through reduced EMIs over a prolonged tenure. While this method may help alleviate the burden on finances as of now, it will result in an overall increased outflow of money as interest.
However, not all are lucky to benefit from an extended loan tenure, especially, those nearing retirement. Lenders are apprehensive about granting a moratorium or prolonging a loan tenure to retired borrowers or those about to retire in a few months. Prepaying the home loan with a surplus amount may help get rid of the burgeoning burden of the unwanted extra interest on the loans taken.