RBI's inflation control measures turn home loan EMIs inflationary

Chennai, Dec 7 (IANS) Even as the Reserve Bank of India (RBI) is hiking repo rate to control inflation, home loan borrowers will see their equated monthly instalment (EMI) turning inflationary, say in a month's time, said officials from housing loan companies.

On Wednesday, the RBI hiked the repo rate by 35 basis points.

The repo rate is the rate at which RBI lends to commercial banks. Housing finance companies in turn borrow from the commercial banks and lend to homebuyers.

This fiscal, the RBI has increased repo rate by 2.25 per cent and the housing loan companies will pass on the increased rate to their borrowers.

So what will be the impact on a home loan borrower?

"If a person had borrowed Rs 1 lakh as housing loan at 8 per cent earlier this year, the EMI would have been about Rs 835 per month. With the passing of the 2.25 per cent interest rate hike, the person's EMI will go up to about Rs 965 per month," Alok Aggarwal, Managing Director and CEO at National Trust Housing Finance Ltd, told IANS.

According to Aggarwal, on a 20-year loan for about Rs 30 lakh, the EMI will be about Rs 29,000 at about 10 per cent interest rate, factoring the 2.25 per cent interest rate hike.

According to D. Lakshminarayanan, Managing Director, Sundaram Home Finance, the 35 basis points repo rate increase would translate into an increase of Rs 23 for every lakh on a 20-year loan.

"I don't think this will dampen the home loan demand," Lakshminarayanan told IANS.

According to Aggarwal, the rate hikes have reduced the discretionary spending of households.

He also said that home loans are now taken only by the end-users, and not by the investors or speculators.

According to Shishir Baijal, Chairman and Managing Director at Knight Frank India, out of 190 bps repo rate hike (prior to Wednesday's rate hike), 105 bps rise has already been transmitted in the marginal cost of funds based lending rate (MCLR).

"The mortgage rates have increased in line with the MCLR and the cumulative growth in residential sales in the last six months have understandably begun showing some signs of slowing," Baijal said.

He said the affordability of the homebuyers has also reduced by 10 per cent since the beginning of this interest rate hike cycle.

Experts said home loan borrowers can look at the option of switching the loan to another lender at lower interest rate or ask for extension of the loan period, which in turn will reduce the EMI quantum.

Switching lenders will be easy for floating rate borrowers, provided they have a good repayment history, experts said.

The impact will be more on the borrowers who took loan recently, and they will have to hope for salary hikes.

For those who took home loan several years back, the rate hike may not have any major impact as their salaries would have increased.

(Venkatachari Jagannathan can be reached at [email protected])