RBI lending rate hike: What it means for the common man

Home loans to get dearer; EMIs, tenure to increase

Hyderabad: The RBI increased the benchmark lending rate by 35 basis points to 6.25% on Wednesday. The rate has gone up 225 bps since May. The latest hike comes after a 40 bps increase in May and a 50 bps hike each in June, August and September. The home loans are priced about 250-270 bps higher than the benchmark. At this rate, the new interest rates for home loans will be around 8.75%, varying with the bank, customer profile and loan size. These changes will increase the home loan EMI or tenure or both in some cases.

How it impacts

For a Rs.50 lakh loan, at 6.5% (as was the case early this year), the EMI was Rs.37,270. The tenure was pegged at 240 months (20 years). At this EMI, the total interest outgo for the loan period would have been Rs.39.4 lakh while repaying the principal amount of Rs.50 lakh.

Now, for the same Rs.50 lakh taken at 8.75%, the tenure increases to 360 months due to higher interest burden. Currently, the home loans are given for a maximum of 360 months (30 years). In other words, the 20-year loan has turned into a 30-year loan. The EMI will be slightly higher at Rs.39,350. But the overall interest paid will jump drastically to Rs.91.6 lakh from 39.4 lakh (while paying the loan at 6.5% interest).

If the loan tenure is to be maintained at 240 months (20 years) under the revised interest rate of 8.75%, then the EMI should be raised to Rs 44,200 from the Rs 37,279 paid earlier. That is an increase of Rs 6,921 per month over what was paid in March or so.

How to deal?

Increasing the EMI by about 5% from Rs 39,350 to Rs 41,300 will cut the tenure from 360 months to 295 months. In this case, the total interest outgo will be Rs 71.8 lakh, nearly Rs 20 lakh lower when compared to paying an EMI of Rs 39,350.

Increasing the EMI by 10% to Rs 43,269 from Rs 39,350 per month will reduce the total number of EMIs to 255 months from the earlier 360 months. At this rate, the total interest outgo will be Rs 60.1 lakh, about Rs 31.5 lakh lower than the Rs 91.6 lakh estimated for 360 months tenure.

In another case, if the EMI is increased 5% annually for eight years, the loan period will be reduced back to 240 months. The total interest outgo will be Rs 52.9 lakh, lower by Rs 38.6 lakh from the Rs 91.6 lakh estimated for 360 months. The starting EMI will be Rs 39,335.

Prepayment

If you are able to make 5% annual prepayment of the loan amount (about Rs 2.5 lakh), then the loan will be reduced to 122 months from the estimated 360 months. In this case, the interest amount will be Rs 25.3 lakh. The EMI will be around Rs 39,335. This prepayment can be planned once every 12 months.

If you are able to make 5% annual prepayment of the loan balance, then the tenure will reduce to 156 months from the estimated 360 months. The interest outgo will be Rs 30 lakh and the EMI will be around Rs 37,279. This prepayment can be planned once every 12 months.

Those who have taken loans early can extend the loan tenure if increasing the EMI is not possible. But those who start late (in their 40s), the tenure cannot be increased much as this is linked to retirement age. In such cases, the EMIs will go up significantly to recover the full loan before retirement.