EMIs Set To Rise For Six Out Of Every 10 Home Loan Borrowers

After the first rate hike under the external benchmark-linked lending rate regime, nearly 60% of existing home loan borrowers will likely see their monthly instalments or loan tenures increase.

India's Monetary Policy Committee, in an off-cycle meet, decided to hike the benchmark repo rate by 40 basis points to 4.4%, Reserve Bank of India Governor Shaktikanta Das said on Wednesday. This is the first time the MPC has raised rates in two years.

With this, all loans linked to the repo rate under the external benchmark framework will see an upward revision. While for new borrowers the increased rates will apply immediately, banks will revise rates for existing customers at a pre-decided date.

As of December 2021, home loans linked to the external benchmark constituted 58.2% of all floating rate housing loans extended by scheduled commercial banks, according to the RBI data. In comparison, home loans linked to the marginal cost-based lending rate constituted 33.1%, while the base rate regime accounted for the rest.

All fresh floating rate loans extended to retail and small business borrowers from Oct. 1, 2019 were linked to an external benchmark, according to the regulator's guidelines. Most banks had chosen the repo rate as the benchmark.

Of all floating rate loans extended to micro, small and medium enterprises, external benchmark-linked loans constituted nearly 70%. Overall, external benchmark-linked loans constitute 39.2% of the total outstanding floating rate loans extended by banks as of December.

The external benchmark framework was introduced to bring in more transparency in the way banks price their loans. It encouraged better transmission of rate cuts by the RBI over the last three years.

Between October 2019 and March 2022, the benchmark repo rate has been cut by 140 basis points. At the same time, weighted average lending rates for outstanding rupee loans has fallen 143 basis points, while the WALR for fresh rupee loans dropped 170 basis points, according to the RBI's assessment.

The external benchmark regime has also resulted in multi-decade low interest rates on home loans over the last 12 months. Lenders managed to cut home loan rates to as low as 6.5%.

But with the current hike, floating rate loans will see a revision, making home loans and other retail loans more expensive.

“A lot of the incremental borrowing that has happened is linked to the repo rate. Even the 6.5% housing loan rates are actually one-year rates linked to an underlying floating rate,” Ananth Narayan, professor-finance at SP Jain Institute of Management Research, told BloombergQuint. “You are going to see that pinch being passed on to borrowers because the banks are not going to take it.”

According to Pankaj Mathpal, a certified financial planner, if interest rate increases by 40 basis points and EMI remains unchanged, then a 20-year loan will be paid off in around 21.50 years.

Anuj Puri of Anarock Group said, “Unfortunately, for homebuyers, this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.”

“This rise in interest rates will ultimately impact overall acquisition cost for homebuyers, and may dampen residential sales to some extent," he said. "...The current sales velocity will thus be impacted by rise of more than 10% in overall acquisition costs.”