Home youth program budget Lending EMIs set to rise for borrowers, FD investors will benefit

Lending EMIs set to rise for borrowers, FD investors will benefit

In a surprise press conference at 2pm today, the Governor of the Reserve Bank of India (RBI) announced that policy rates had been raised. In line with the announcement, the RBI increased the repo rate by 40 basis points to 4.40% from 4% earlier. The last time the repo rate was cut was in May 2020 and it has remained unchanged ever since. The hike will take effect immediately. The cash reserve ratio (CRR) was increased by 50 basis points, which will put further upward pressure on interest rates. It looks like borrowers should prepare for an increasing EMI load and FD investors can expect better returns on new FDs.

Many signals indicate that this could be the start of a cycle of higher interest rates.

According to global indicators, US retail inflation rose 40 years ago to 8.5% in March. In addition, the Fed indicated a 50 basis point hike (100 basis points = 1%) in its next policy announcement.

Similarly, retail inflation in India, as measured by the Consumer Price Index (CPI), for March 2022 rose to 6.95%. In April’s monetary policy, the central bank said the main objective was to ensure inflation remained on target going forward, while supporting growth. The main mandate of the central bank is to manage retail price inflation and ensure that it remains within the 2-6% range.

With further possibilities for key rate hikes, here’s what’s likely to happen to FD rates now and what depositors should do. Plus, we also tell you what borrowers should also expect.

Short-term deposit rates may rise first
Whenever the interest rate cycle turns around from the bottom, it is usually short and medium-term interest rates that are likely to rise first. As for long-term interest rates, it will take a little longer for these rates to rise significantly.

Avoid locking in longer-term deposits at a lower rate
If you are planning to book an FD now or looking to renew your existing FD, it will be best to opt for a shorter term FD, say one year or less, so that your deposit is not locked in at a lower rate for a long time. Whenever the short and medium term rates increase, you can start increasing the duration of the FDs accordingly.

Impact on borrowers
If you’re thinking of taking out a loan, you’d better do it quickly, as interest rates on loans may soon rise.

This rise is bad news for existing borrowers as well as banks and other financial institutions who will soon start raising interest rates on loans, which in turn means that loan EMIs will also rise.

How your loan EMIs will be affected by the latest hike.

Loan amount (Rs) 30,00,000
Term (years) 20
Current interest rate (%) 6.8
Current EMI (Rs) 22,900
New interest rate (%) 7.2
New EMI (Rs) 23,620
Increase in EMI (Rs) 720

SBI term home loan interest rate for loan up to Rs 30 lakh for salaried male borrower. The interest rate is linked to the repo rate.

All loans will be impacted by the latest policy decision, whether it is a home loan, car loan or personal loan. Here’s a look at the impact of each loan and what an existing borrower and someone looking to take out a new loan can do.

How new borrowers will be affected

If you are a new borrower considering taking out a loan, you need to act quickly so that your loan is repaid at the lower prevailing rates.

This mainly matters for fixed rate loans like auto and personal loans where the EMI stays the same throughout the life of the loan. The entry point is therefore crucial. If you take out a loan at a time when the interest rate is low (like now), you can continue to profit from the rate for the life of the loan, even when the overall interest rate increases.

However, for home loan borrowers, the timing of taking out the loan does not really provide a significant portion as this rate hike may not result in a significant difference in interest payment and EMI payments as it is mainly variable rate loans. So even if you enter at a lower rate now, you will have to pay a higher rate later when the lender raises their interest rates.

Impact on existing borrowers
If you are an existing borrower of fixed rate loans such as a car loan or personal loan, the interest rate hike will have no impact on your loan and you can continue to pay your existing EMIs.

However, borrowers of existing home loans will be the most affected, as most home loans are variable rate, with any such increases being passed on to the borrower. All floating rate mortgages taken out after October 1, 2019 are linked to an external benchmark as per RBI’s mandate. As most banks have chosen the repo rate as an external benchmark, a rise in the repo rate will most likely result in higher loan interest rates. Banks are required to revise their benchmark-based external lending interest rates at least once every three months to align them with the external benchmark to which they are linked.

SBI term home loan interest rate for loan up to Rs 30 lakh for salaried male borrower. The interest rate is linked to the repo rate.

Whenever the home loan interest rate increases, the first thing most lenders do is increase the term of the loan rather than increasing the EMI amount. This is uneconomical for the long-term borrower, especially when dealing with a long-term loan such as a mortgage.

There may also be scenarios where the lender itself will not allow the borrower to increase the term of the loan. This happens when the borrower is over 60 years old. In this case, the lender will increase the amount of the EMI and keep the term unchanged.

What should a borrower do?
The longer you keep the term of your loan, the more interest you will end up paying. Since the latest repo rate hike is not substantial, if you can afford the higher EMI, it will help you keep interest charges low and close the loan sooner. However, if you find it difficult to pay the increase, you can consult your lender and ask them to increase the term (if possible).

If your loan is more than 5 years old, it will be a good idea for you to check the interest rate regime (i.e. BPLR, base rate, MCLR or external benchmark rate (EBR)) under which your loan has been sanctioned. If you haven’t transferred your loan to an external reference linked loan, chances are you’ll be paying a much higher interest rate than lenders charge on the new external reference linked home loan. If you are paying a higher rate, you can ask your existing lender to convert your loan to an EBR-linked loan for which you may have to pay a nominal conversion fee.

However, if your lender does not offer this facility or charges a higher rate even on an EBR-related home loan, you may consider switching your loan to a new lender. Being a variable rate loan, there is no penalty for changing. This means that the only factor you need to check is the new lender’s processing fees and fees and compare that with the interest benefit you would get from the switch. If the net profit sounds good to you, you can move on. Borrowers should consider a balance transfer when the interest rate reduction is 0.5% or more.