- Hike in repo rate to increase home loan rates and EMIs
- For MCLR-linked home loans, the increased EMI needs to be paid on the reset date
- MCLR-based regime offers transparency and dynamic interest rate environment
- Bajaj Finserv Flexi Hybrid Loan offers a principal holiday for up to 4 years
While the Reserve Bank of India (RBI) left the repo rate untouched for nearly five years, in the last three months it has gone for a back-to-back hike of this key policy rate at which it lends money to banks. With the current repo rate standing at 6.50%, financial institutions have already started tightening their interest rates on various loans including home loans. If you are serving home loan EMIs, the latest move from the apex bank has a direct impact on the EMI amount. Read on to know how the hike in repo rate impacts your home loan EMIs.
Impact on EMIs
Note that home loans disbursed on or after 1st April 2016 are directly linked with the marginal cost based lending rate (MCLR). The hike in repo rate will push up MCLR and with an increase of 50 bps in the repo rate, MCLR rates are almost bound to go up. Even a hike of 25 bps in MCLR has a significant impact on EMI and the total interest outgo as highlighted in the table given below:
|Loan Amount||Tenor||Assumed Current Rate of Interest||Present EMI||New Rate of Interest||New EMI||EMI Amount Increase||Increase Interest Outgo|
|Rs.30 lakh||20 years||8.5%||Rs.26,035||8.75%||Rs.26,511||Rs.476||Rs.1,14,655|
You can use this home loan calculator to know the changes in the EMI amount and find out the interest and total payment to be paid.
Impact on existing borrowers
The impact on existing borrowers following the hike in repo rate depends on whether their home loan is linked with the MCLR or base rate.
1). Home Loans Linked with MCLR
Home loans linked with MCLR are advantageous to borrowers as it provides them with a more dynamic interest rate environment. It is essential to note that home loan interest linked with MCLR changes only on a pre-defined reset date. This reset date varies across financial institutions and as per RBI mandate, banks can have a maximum reset period of up to a year.
Hence, if your home loan is MCLR-linked, you need to pay the increased EMI on your home loan only after the reset date. The new EMI is calculated based on the prevailing MCLR rates on the reset date.
2). Home Loans Linked with Base Rate
If your home loan is linked with the base rate, then the impact of the hike in repo rate is instantaneous. As most lenders have increased home loan interest following RBI’s decision, you need to pay an increased EMI amount. So, if your home loan is linked to the base rate, it’s prudent to switch it to the MCLR regime.
Other ways to reduce EMI burdens
While shifting a home loan from base rate to MCLR is an option to reduce the burden of high EMIs, another prudent way to go about it is to find innovative home loan offerings where you can get a holiday period on the principal along with the option to pay only interest as the EMI.
One such home loan offering is the Bajaj Finserv Flexi Hybrid Loan, where you need to pay just the interest on EMI for the initial tenor with a principal holiday for up to 4 years. For the balanced tenor, you need to pay the principal and the interest only on the amount utilized. Also, you can part pay and foreclose the loan amount without any additional charges.
With EMIs constituting only the interest component during the initial tenor, the EMI amount reduces drastically and thus you don’t have to wait until a reduction in home loan interest rates to purchase your dream home.