Home loan borrowers, especially the ones who took a home loan before May 2022, are going through one of the most difficult times. This is because the RBI raised the repo rate by 2.5% from May 2022 to February 2023. All floating rate home loans are now linked to an external benchmark and the repo rate is the benchmark for most such home loans. So, if the repo rate goes up, the interest rate of these home loans also go up by a similar quantum.
A 2.5% hike pushes EMIs up by 20% and total interest up by 44%
Due to the steep rise in repo rate, these borrowers have seen an unprecedented increase in their home loan tenure or a steep hike in their home loan EMIs. For instance, on a Rs 50-lakh home loan taken for a tenure of 20 years, if you have to pay a higher interest rate of 9.5% instead of 7%, then your EMI goes up by 20% from Rs 23,259 to Rs 27,964. The impact on total interest payment during the tenure of the loan is overwhelmingly high as it goes up by 43.73% from Rs 25.82 lakh to Rs 37.11 lakh.
This kind of an adverse impact can jolt any borrower. The best remedy they can get against this hike is to see a similar rate reduction soon, but that is highly unlikely to happen. However, even a smaller reduction in interest rate can bring great relief. So what are the chances that the interest rate on these home loans will fall in the near future?
Will the interest rates fall any time soon?
The biggest relief home loan borrowers want is to see a significant fall in the interest rates so that their EMI burden comes down. So let us understand the likelihood of the interest rates coming down in the near future.Elevated inflation may not allow rates to fall soon
The RBI has the primary responsibility to keep retail inflation in the range of 2-6%. If inflation remains above this range for a considerable period, the RBI is often compelled to go for a repo rate hike. So the direction of inflation is the most prominent factor that will determine the movement of the interest rate.
Crude oil prices are one of the biggest drivers of inflation worldwide. From below $75 per barrel in June this year, Brent crude oil prices have gone up to over $90 per barrel. Therefore, a spike in inflation cannot be entirely ruled out. If inflation rises sharply, the central bank may have to go for a repo rate hike.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, says the US dollar and bond yields have been on an uptrend. “Narrowing interest rate differentials to record low levels poses severe financial instability, thereby warranting a cautious approach by the RBI,” she says. Any action to reduce the rate will further reduce this differential and may put more pressure on the USD exchange rate, which the RBI would like to avoid.
However, the possibility of higher interest rates on short-term FDs cannot be ruled out. “We expect the RBI to prefer keeping the short-term rates elevated in the near term by using liquidity tools, given the pressure on INR and the underlying inflationary risks,” says Bhardwaj.
Another prominent indicator of the direction of the interest rates is the yield of the 10-year G-sec. Yield of the 10-year government bond, which had fallen below 7% in May, has risen above 7.2%. It indicates a rising trend in interest rate.
Another prominent factor that decides the interest rate’s direction is liquidity in the banking system. A tight liquidity situation pushes up the interest rates, especially on FDs with short tenures. “Liquidity conditions have tightened and borrowing costs have remained elevated since the last policy,” says a report published by CareEdge, a credit rating company. What it reaffirms is that the possibility of any reduction in interest rates is highly unlikely.
What should borrowers do?
If you are a home loan borrower, there is hardly anything you can do about the interest rate movement, but you can at least ensure that you are getting the best possible deal on your home loan. As interest rates have peaked, most borrowers will be paying the highest interest rates seen in the last three years on their EMIs. If you are an old borrower, servicing a loan under previous regimes like the MCLR or base rate, then it may be a good time to shift to the new EBLR regime. This is because when there is a fall in interest rates, you will quickly benefit from it.
Compare your interest rate with those of other lenders. If you find that they are offering a much lower interest rate to a new borrower, you should consider transferring your loan after calculating the net benefit. However, if your lender is giving a much lower rate to new borrowers, then you may request your lender to reprice your loan at a lower rate. Lenders usually charge a repricing fee to restructure your loan at the new rate.
Regular partial prepayment is one of the best ways to pay off your home loan quickly. However, this option works only when you have adequate surplus to make the prepayments. If you have more money in hand after getting a salary raise, then you may consider increasing your EMI so that your total interest outgo can be brought down. If you get a bonus, incentive or any other form of windfall gain, consider going for partial prepayment so that your home loan outstanding comes down; this will help you reduce the tenure and total interest outgo on the loan.