The Monetary Policy Committee of the RBI increased the policy rate by 25 basis points on Wednesday and the repo rate currently stands at 6.50 percent. This increase in repo rate will grow the cost of funds and therefore lead to a rise in the MCLR (marginal cost of funds based lending rate), which banks adhere to while setting interest rates on loans.
For the common man, a repo rate increment means bank deposits will earn a marginally higher interest while the interest rate on loans will also rise. Let’s take a deeper knowledge at the impact on loans and FDs, and what the repo rate hike means for the borrowers and investors.
The hike in repo rate will have a consequence on home loan EMIs. Taking banks’ MCLR will go up, the interest on loans will also go up. As per the RBI rules, all bank loans disbursed post-April 1, 2016, are MCLR-linked and the lending rate cannot be below the MCLR rate. Over the last two monetary policy committee meetings, the repo rate has increased up by a total of 50 bps and here is how it could impact your loan EMI:
Say, you had commenced with a loan of Rs. 30 lakh in January 2017 at 8.5 percent stretched over 20 years. Your EMI is Rs. 26,034 and the total interest payable in 20 years is Rs. 32,48,327. Now if the interest rate rises to 9 percent, your new EMI will be Rs. 26,939, which is almost Rs 1,000 more every month and your total interest payments will be Rs. 34,48,383. This interest payment is Rs. 2 lakh more than the original plan.
if you are still seeking for taking a home loan, you shouldn’t wait any longer as banks are soon going to start increasing the interest rates. Your future EMIs will be calculated based on the MCLR effective on that date for the bank. If you are an existing borrower, your EMI burden is likely to grow once the new MCLR rate comes into effect. For loans taken from NBFCs, and Housing Finance Corporates interest rates will grow similarly.
Irrespective of whether you are a new or existing borrower, relate pre-paying a part of your loan repayment amount. Utilize any surplus money you have in hand to do so. It could be your annual bonus, salary increment or a cash gift. Pre-payment of your loan will reduce your interest outgo.