Less possibility of a rate hikes in near future: Retail inflation which was the biggest factor for RBI to raise rates has cooled down and reached under the 6% level which is the comfort zone of the RBI. 10-year G-sec yield which had peaked at 7.59% in June 2022 with anticipated future hikes, is yet to reach anywhere closed to its previous high again as it is currently hovering around 7.3%. Most of the central banks globally have indicated their interest rate hike cycle reaching close to peak. Commodity prices including crude oil have largely been rangebound.
“If inflation continues to show positive outcomes combined with encouraging high performance economic indicators, we hope to see fewer rate hikes or negligible rate hikes by the RBI, going ahead. Home loan interest rates are already in the higher bracket of 8-9% in recent times. On the optimistic side, we hope not to foresee a further rise in the repo rate and a resultant increase in loan rates. This will help sustain the demand and confidence of homebuyers in the market,” says Ramesh Nair, CEO, India and Market Development, Asia, Colliers.
All these factors hint that we are very close to the peak of the current interest rate hike cycle. Unless there is a significant spike in inflation again the likelihood for another repo rate hike in the next MPC is looking lesser.
Impact on borrowers
Both existing and new borrowers will be adversely impacted by this rate hike. “The recent hike will burden existing borrowers, and new borrowers will have to borrow at higher interest rates. It will make retail loans such as home, auto, and personal loans and others costlier, and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both,” says Adhil Shetty, CEO and Co-founder of BankBazaar.com and Co-Chair of the FICCI Fintech Committee.
Existing borrowers have to pay a higher rate: As per the latest RBI data the weighted average lending rate (WALR) on outstanding (Existing) rupee loans of Scheduled Commercial Banks (SCBs) increased by 10 bps from 9.42 per cent in November 2022 to 9.52 per cent in December 2022. This shows that a large number of existing borrowers on average are paying an interest rate which is close to 10%.
“The rate hike of 25 bps today will make EMIs expensive by approx 2-4%. Borrowers will either have to shell out extra money to repay their loans or will have to extend the tenure,” says V Swaminathan, Executive Chairman, Andromeda Sales and Apnapaisa.com, India’s largest loan distributors. New borrowers can get better rate: While existing borrowers have little room to escape from the clutches of the rising interest rates, however, new borrowers will be relatively better off as they can get lower rate on new loans. As per the RBI data, the WALR on fresh rupee loans of SCBs increased by 2 basis points (bps) from 8.86 per cent in November 2022 to 8.88 per cent in December 2022, which is much lower than the double-digit rate for existing borrowers.
Impact on home loan EMIs under different benchmark regimes: The way the interest rate hike is passed on to borrowers typically depends upon 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 rise will be quickest and equal to the rise in repo rate if it is linked to the 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 instance, for 2.25% hike in repo rate the minimum base rate has risen only by 1.4% from 7.25% in April 2022 to 8.65% in December.
MCLR linked home loan borrowers are better off: As per RBI data the min MCLR (overnight) has risen only by 0.85% from 6.45% to 7.3%, which is much lower than the rise in base rate. Moreover 1-year median Marginal Cost of Fund based Lending Rate (MCLR) of SCBs, which was widely used in benchmarking of the home loans, increased from 8.21 per cent in December 2022 to 8.35 per cent in January 2023 which is lower than the minimum base rate of 8.65%.
How should borrowers minimize the EMI burden
While there is nothing much that can be done about the interest rate movement, however, there are many things related to your home loan which you can do such as reviewing and adjusting to minimise the impact of these rate hikes.
Continue with the lower rate under old regime for time being: The rate hike transmission in the old interest rate regimes like base rate, MCLR or BPLR has been slower. So, there is good likelihood that you would be paying 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 lower rate then it will be better for you to continue with old interest rate regime. The right time for you to switch to new the EBLR regime would be when interest rates start falling 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 rate of interest on your home loan is much higher than the current one being offered under EBLR then it may make sense for you to switch your loan under new regime by paying the applicable nominal fees. In case of your lender is not offering this benefit or other lenders are offering much lower rate 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 other more 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.
Utilise 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 while you were availing 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 encash it 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 which 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 which will bring down your loan outstanding and accelerate the repayment. For instance, bank fixed deposits were offering only 5% interest rate just a year ago, so if you have such deposits, it will be better to use these to prepay your loan. However, you need to factor in the tax related benefit before going ahead with prepayment. If the tax benefit is substantial which brings down the borrowing cost, then prepayment may not be rewarding.