Be prepared to pay higher EMIs: No room for loan tenor increase after RBI’s latest rate hike

• Borrowers have not had to pay bigger EMIs thanks to extended loan tenor until now, but that may change.
  
  
• If borrowers push for longer tenors even after the extensions taken due to the last four rate hikes, it will result in the loan becoming negatively amortised.
  
  
• Negative amortisation is when original EMIs cannot cover the loan principal which will increase every month.
  

Indian home buyers who have been paying back lenders through equated monthly instalments (EMIs) are in for a rude shock as the Reserve Bank of India (RBI) raised a key interest rate for the fifth time this year to 6.25% on Wednesday. Experts say, now, lenders will have to bump up monthly payouts.

While the quantum of the central bank’s hike was lower than the last three increases – at 35 basis points as opposed to 50-basis point hikes earlier, the sharp rise in interest rates in the last seven months will increase the EMI burden extensively.

Moreso because those borrowers who have been avoiding a bigger EMI in lieu of an extended loan tenor until now, have exhausted this option.

Shrikant Shrivastava, chief risk officer, at India Mortgage Guarantee Corporation said that most banks have fully passed on the repo rate increase of 190 bps – in the last four rate hikes – to the consumers of home loans, till date. With the latest rate hike, he expects EMIs to go up further by another 3-5%.

“This rate hike of 190 bps has resulted in a loan tenor increase of around 13 years for borrowers who had initially opted for a 20 years loan period, assuming they had taken a home loan at 6% at the time of home purchase. Alternatively, those borrowers who opted for an EMI increase instead of a loan tenor increase have seen their EMI go up by around 20% already,” said Shrivastava.

Current home loan borrowers, who have had their home loan original interest rate at 10-11% and initial loan tenors above 25 years — will have no option but to increase their EMIs. Any attempt to increase loan tenor further, would result in the loan becoming negatively amortised.

Negative amortisation is when the EMI is unable to cover the monthly interest payment – it means that every month, the loan principal goes up instead of going down, in spite of payments. That would result in the loan ballooning over the long term, making it expensive for the borrower.

Here is how much your interest rate will go up

Anuj Puri, the chairman of Anarock Group believes that the rate hike is a set back for new and old borrowers both, as borrowers will have to shell out more per month as EMIs. “Soon, banks and lending institutions will follow suit with today’s repo rate hike and increase their marginal cost of fund-based lending rates (MCLR). For existing borrowers, their EMI will be revised at the reset date of their loans,” Puri said.

As the rate of interest is hiked by 0.35% and if it is passed on to the consumer by the banks, then the EMI of a loan of ₹10 lakh taken at 8.5% for ten years will increase by around ₹300 per month, said Atul Monga, chief executive and founder of Basic Home Loan.

Similarly, for a ₹50 lakh loan outstanding with a bank at a 10% interest rate spread across 20 years, the effective EMI would be ₹48,251. After the rate hike is passed on, the new EMI would be about ₹49,249 – a monthly increase of ₹998.

“To deal with the impact of a higher interest rate, it is important to maintain good credit, research the best rate offers, and consider refinancing existing loans to lower the monthly payments. Customers can also opt for long tenures or switch to a floating rate of interest," Monga said.

A few real estate consultants, however, believe that the rate at which banks will pass on the interest rate hike might not be as much. “The rise in policy rate leads to an increase in lending rates, which impacts the sentiment of stakeholders. However, the moderation in repo rate hike augurs well for the real estate sector as its pace has slowed down even as the resultant transmission to end-users is likely to be delayed or moderated by the banks,” said Samantak Das, chief economist, and head of research at JLL India.

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