Interest rates have started moving up, following the recent volley of repo rate hikes by the RBI. At least four major banks have already increased their lending rates and more are likely to follow soon. The hike will mean higher EMIs for new loans and extended tenures for existing floating rate loans. At the same time, banks have raised their deposit rates, bringing cheer to investors. Here is how the rate hike will impact borrowers and investors.
The interest rate will go up, which will extend the tenure of the loan. The impact will be bigger on longer loans. In case of a 20-year loan, at 7%, every 0.25% hike in rate will increase the tenure by roughly 10 months. The repo rate has been hiked by 0.9% in two tranches. If your home loan has 19 more years to go and the rate is increased by 0.75%, be ready to pay 30 more EMIs.
The impact will not be so dramatic in shorter tenure loans. So if your home loan is nearing completion, you need not get too worried by the rate hike.
If you do not want the loan tenure to be extended, you can either make a lump-sum payment or request for an increase in the EMI. If the interest rate is hiked from 7% to 7.75%, you will need to pay roughly Rs 5,000 per Rs 1 lakh to retain the original tenure. Alternatively, you can get the EMI increased so that the tenure remains the same. The EMI will be increased by roughly Rs 45 per Rs 1 lakh.
As interest rates go up, so will the EMIs. Here again, the impact will be greater in long-term loans while short-term borrowings will see a marginal difference. Every 0.50% increase in a 20-year home loan interest rate will add roughly Rs 30 to the EMI per Rs 1 lakh.
(With inputs from agencies)