How Repo Rate Impacts Your Home Loan Tenure

Keeping in tune with the multiple repo rate hikes by the Reserve Bank of India (RBI) to combat inflation this year, banks have increased their lending rates. Most major banks have raised their External Benchmark Lending Rate (EBLR) by 50 bps (100 bps = 1%) and their Marginal Cost of Funds Based Landing Rate (MCLR) by 10 bps or 0.05% across various tenures. MCLR is the minimum interest rate below which banks or non-banking financial corporations (NBFCs) cannot lend (unless faced with exceptional cases).

The cascading effect on home loan interest rates

The interest rates offered by banks on various kinds of loans, including Home Loans, are based on the repo rate, i.e., the rate at which they borrow money from the RBI. Thus, there is a direct home loan – repo rate connection.

In simple terms – if the bank is paying a lower interest to the RBI, it has more cash at its disposal. So, it will be in a position to pass on the benefit of the low repo rate to its customers.

During the peak of pandemic in India, when the Repo Rate was down to 4%, home loan interest rates went down to as low as 7%. As of now, the EBLRs being offered by major banks are around or over 8.50%.

What happens to homebuyers’ loan tenures and EMIs?

Most banks would like to cause the very minimum of fluctuations in their customers’ home loan Equated Monthly Instalments or EMIs. After all, despite the repo rate hike, there is stiff competition in the home loan sector and no financial institution wants to lose its customers.

As a result, banks would easily agree to extending a homebuyer’s repayment tenure and keeping the EMI amount approximately the same. However, in certain cases (such as the prime home loan segment), this can become challenging. That’s because these loan amounts are generally high, with usually already longer loan tenures i.e. 30 years. In these cases, increasing the loan repayment period makes little sense as it would go beyond the borrower’s active working years.

Generally, the maximum loan tenure offered is 30 years – depending on the age of the borrower at the time of applying for the home loan.

Understanding how home loan tenures change with repo rate

With multiple repo rate hikes this year, most major banks have increased their EBLR by 190 basis points. This means that their home loan interest rates have likely gone up by 1.5% since the lowest rates offered during the peak pandemic period in the country (2021).

Let’s take a look at how a 1.5% increase in the Home Loan Interest Rate stands to change the loan tenure or the EMI for different loan amounts.

Home loan interest rate hike impact on EMI if loan tenure is kept fixed:

Home loan interest rate hike impact on loan tenure if EMI is kept fixed:

Repo rate linked changes in top banks’ lending rates

• State Bank of India (SBI) hiked its EBLR and repo-linked lending rate by 50 basis points. Its EBLR is now 8.55%.
• Punjab National Bank (PNB) has raised its repo-linked lending rate by 50 basis points and its MCLR by 5 basis points. The new RLLR is 8.40% while the revised MCLR or base rate is 8.80%.
• According to a BSE notification issued by HDFC, “HDFC increases its Retail Prime Lending Rate (RPLR) on housing loans, on which its adjustable rate home loans (ARHL) are benchmarked, by 50 basis points, with effect from October 1, 2022.”
• ICICI Bank announced a 50 bps increase in its EBLR, which now stands at 9.25% per annum.
• Bank of Baroda’s RLLR, effective October 1, 2022, is 8.45%.
• Bank of India has hiked its base rate or MCLR by 0.20%, taking it to 9%. Its Revised Repo Based Lending Rate or RBLR is 8.75% now.
• Yes Bank’s revised MCLR is 9.25%.

Advantages of extending your loan tenure when repo rate goes up

Apart from the fact that loan tenures and EMIs are inversely proportional to each other, there are other advantages to extending your home loan tenure:

• Home loans make you eligible to claim tax benefits. A longer loan tenure, therefore, means that you get to avail of income tax benefits under sections 80C and 24 of the IT Act for a longer period.
• With your loan tenure getting extended, your EMIs will either remain the same or increase only marginally. This will substantially reduce any impact on your monthly budget.

However, a longer loan tenure also means that you end up paying a higher amount towards your loan, i.e., the overall amount you pay as interest goes up.

E.g., according to the SBI Home Loan EMI Calculator, a Rs 50 lakh loan repaid over 30 years at an interest rate of 8.5% will cost you Rs 8,840,443 as the overall interest paid. But if you repay the same loan (at the same interest rate) over a period of 20 years, your overall interest amount gets reduced to Rs 5,413,879.

So, a good solution would be to choose the highest EMI amount that you can afford and then spread it over an optimal loan repayment tenure.

In addition, you should try and pay more than your regular EMIs – whenever possible. You could wait till the end of each year and consider what extra amount you could spare towards your loan settlement.

You can also increase your EMI by 5% every year.

The good news is experts opine that the home loan EMIs could very well be peaking. Although the RBI may hike the repo rate further, chances are that banks would be wary of continuously burdening their customers due to intense competition. In such a scenario, it is very likely that they would absorb some of the increase at their own end.