Both existing and new retail borrowers will now pay higher equalized monthly installments (EMI) on their mortgage loans and loans against property, after the Reserve Bank of India (RBI) increased the repo rate by 40 points basic (bps) on Wednesday.
Auto loans will also be more expensive for new borrowers. However, those who have taken a loan at a fixed interest rate will be saved.
For any existing contractual deposits, such as bank time deposits or recurring deposits, the rate will not change. However, if banks raise interest rates on new deposits, savers will benefit.
Impact on home loan borrowers
The proportion of floating-rate loans tied to external benchmarks, such as the repo rate, hovered around 40% as of December last year. More than two dozen lenders currently offer sub-7% mortgage loans, but the days of sub-7% rates may be coming to an end.
With the repo rate rising, variable rate loans will become more expensive and all new loans are likely to be priced higher.
On a home loan of Rs 50 lakh for 20 years at 7%, the current EMI is Rs 38,765 and the interest payment for the entire tenure would be Rs 43.03 lakh.
If the rate rises to 7.4%, the EMI will rise to Rs 39,974 and the total interest payment for the full period will rise to Rs 45.93 lakh. In other words, the EMI will increase by Rs 1209.
Adhil Shetty, CEO of BankBazaar.com, says that if a borrower has a floating rate loan, the EMI may be fixed for the tenure, but the tenure itself will increase with the increase. “To deal with this increase, you could refinance at a lower rate, increase your EMI, and make regular prepayments,” he explains.
Impact on other loans
Auto and personal loans generally attract fixed rates. For those who have already taken out these loans, there is nothing to worry about as the EMI and interest rates will remain the same. However, floating rate loans will be more expensive, as will new loans.
For a car loan of Rs 4 lakh over 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 rise to Rs 8,091 and the total interest payment will rise to Rs 85,486.
Impact on time deposits
Deposit rates are decided by banks’ asset and liability management committees after taking into account the existing deposit base, funding requirements, maturities of existing loans and requirements, and prevailing rates in the market. market. With the increase in the repo rate, the rates on bank deposits may also increase.
Typically, when interest rates rise, rates on short- and medium-term deposits rise initially, followed by long-term deposits. Joydeep Sen, a fixed income expert, says the RBI’s rate hike would lead to higher deposit rates. “But any meaningful pass-through of higher deposit rates will take time, as banks have excess liquidity today,” he says.