The interest rate hike cycle will most likely reached the peak of its current cycle and should remain so for some more time as the Reserve Bank of India (RBI) has decided to hold the repo rate at 6.5% in its monetary policy meeting on April 6. However, the current rate hike cycle which started in May 2022 already witnessed a hike of 2.5% in repo rate prior to this MPC meeting. So, if you were paying an interest rate of 6.75% in April 2022 with the total increase of 2.5%, your new interest rate under the EBLR regime would have risen to 9.25%. This would mean that for a home loan of Rs 50 lakh with the most popular tenure of 20-year your EMI would have risen form Rs 38,018 to Rs 45,707, which is a hike of 22%.
However a rate pause now may not necessarily be the end of all worries for the home loan borrowers. There are many issue with which the borrowers will be confronted with. Will this be the end of the current cycle of interest rate increases? How will the home loan borrowers be affected and what are the options they have to lower their EMI burden?
Rate hike cycle is likely to take a pause
Retail inflation which was the main reason for RBI to increase rates went down below 6% in December 2022 but went up again to 6.44% in February 2023, which is above the comfort zone of the RBI. With the current pause, RBI will be hoping that inflation will go back below 6% so that it can stop the rate increase cycle in future as well.
"RBI’s pause comes despite the previous readings being elevated above 6%. Given today’s policy decision we expect the RBI to maintain an extended pause and evaluate the lagged impact of previous rate hikes and global uncertainties on growth-inflation dynamics," says Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
"The RBI's choice to keep policy rates unchanged will offer relief to borrowers. We are optimistic that this decision will contribute to stabilizing the economy and curbing inflation in the long run," says V Swaminathan, Executive Chairman, Andromeda loans and Apnapaisa.com.
The 10-year G-sec yield, which reached 7.59% in June 2022 due to expected future increases, fell down subsequently and has not come close to that level again and is now around 7.27%. Most of the central banks around the world have signaled that they are near the end of their interest rate increase cycle. Commodity prices, including crude oil, have mostly stayed within a range.
"Homeowners will meet this announcement with a sigh of relief since they were reeling under the pressure of lengthening loan tenors and rising interest rates. More importantly, inflation has softened though it remains higher than RBI's tolerance level. It's expected inflation will continue to soften.” says Adhil Shetty, CEO, Bankbazaar.com.
"Even though industry experts were of the view that the RBI would hike repo rate by up to 25 basis point in the first bi-monthly policy of the current fiscal, the MPC has given the real estate sector a pleasant surprise by hitting a pause button on the expected rate hike," says Angad Bedi, Managing Director, BCD Group.
All these factors suggest that we are nearing the peak of the current interest rate increase cycle. Unless inflation rises sharply again, another repo rate increase in the next MPC seems less likely.
Existing borrowers to continue paying a higher rate
According to the latest RBI data, the weighted average lending rate (WALR) on outstanding rupee loans of Scheduled Commercial Banks (SCBs) went up by 9 bps from 9.58 per cent in January 2023 to 9.67 per cent in February 2023. This shows that a large number of existing borrowers on average are paying an interest rate close to 10%.
Benefit of new borrowers reducing
While existing borrowers have little choice but to bear the brunt of the rising interest rates, new borrowers will be relatively better off as they can get lower rates on new loans. However, the benefit that new borrowers had is getting smaller with each passing month. According to the RBI data, the weighted average lending rate (WALR) on fresh rupee loans of SCBs went up by 24 basis points (bps) from 9 per cent in January 2023 to 9.24 per cent in February 2023, which is much lower than the rate for existing borrowers.
Impact on home loan EMIs under different benchmark regimes
The way interest rate increase is passed on to borrowers typically depends on the benchmark regime under which the borrowers are paying their loans. If your home loan is relatively new, taken under External Benchmark Linked Rate (EBLR), then your EMI increase will be fastest and equal to the increase in repo rate if it is linked to repo rate. However, the transmission in base rate linked loan is relatively slower while it is slowest in case of MCLR linked home loans. For example, for 2.25% increase in repo rate, the minimum base rate has risen only by 1.4% from 7.25% in April 2022 to 8.65% in December. While most of the MCLR loans saw a hike of 1.35% since May 2022 to Feb 2023.
How should borrowers minimize their EMI burden
While there is not much that can be done about the interest rate movement, there are many things related to your home loan that you can do such as reviewing and adjusting to minimize the impact of these rate increases.
Stay with the lower rate under the old regime for now: The rate increase transmission in old interest rate regimes like base rate, MCLR or BPLR has been slower. So, there is a good chance that you would be paying a much lower interest rate than what the new borrowers under EBLR are paying.
Therefore, you need to compare your interest rate with the current rates and if you are paying a lower rate, then it will be better for you to stay with the old interest rate regime. The right time for you to switch to the new EBLR regime would be when interest rates start dropping as you will get the quick benefit of rate reduction under EBLR regime.
When to switch or transfer your old regime loan: After comparing your interest rate with the new borrowers of the same lender, if you find that the interest rate on your home loan is much higher than the current one offered under EBLR, then it may make sense for you to switch your loan under the new regime by paying the applicable nominal fees. If your lender is not offering this benefit or other lenders are offering much lower rates, then it is better to transfer your loan to a new lender.
Time to refinance your loan with a new lender: Under EBLR, there is hardly any scope for the same lender to give the borrower a better rate. Therefore, you need to compare your interest rate with the most competitive lenders in the market and check the difference. If the difference is 0.5% or more, it would be beneficial for you to switch to a better lender.
Use improved credit score to get the competitive rates: There are chances that you would not have got the loan from the most competitive lender offering the lowest rate when you were taking your home loan due to credit history related or other issues. However, if you have built a good score over time through disciplined repayment, it is time for you to cash in and shift your loan to the lender offering the most competitive rate.
Use low yielding assets to prepay and accelerate your repayment: If you have some investments that are earning lower return than what you are now paying as interest on your home loan, then it will be advantageous for you to consider partial prepayments that will reduce your loan outstanding and accelerate the repayment.
For example, bank fixed deposits were giving only 5% interest rate a year ago, so if you have such deposits, it will be better for you to use them to prepay your loan. However, you need to consider the tax related benefit before going ahead with the prepayment. If the tax benefit is significant which lowers the borrowing cost, then prepayment may not be worthwhile.
