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Taking a Loan to Buy a Home or Car? Here’s How RBI Rate Hike Will Affect You

The maximum impact of the hike will be on the home loan borrowers as loans are taken for a longer period.

Those postponing plans to buy homes and cars till lending rates dip may have to wait a little longer. Commercial banks are likely to pass on the burden of RBI spiking both repo and reverse repo rates in its bi-monthly monetary policy review meet on Wednesday.

With this, all types of loans – including home loan and personal loan – are set to cost more. A majority of banks and housing finance companies had recently hiked their marginal cost of funds-based lending rates (MCLR) – ahead of the RBI policy. 

For instance, banks and HFCs such as SBI, HDFC, ICICI Bank, PNB, Bank of Baroda, UBI, and Kotak Mahindra Bank have raised their MCLR ranging from 5 basis points to 20 basis points. Just a couple of months earlier also, some banks had raised their MCLR.

The maximum impact of these hikes will be on the home loan borrowers as home loans are taken for a longer period. Financial experts believe that as home loans are usually pegged to 1, 2 or 3-year MCLR, they are set to cost more with the upward revision in MCLR.

Although the hikes in MCLR – in most cases – are yet to translate into the actual hike in the lending rates, but that seems imminent. Therefore, both the existing as well as the potential borrowers of home loan and other loans should be prepared to shell out more in case that happens.

Let’s take a real-life example in the case of a home loan:

Presuming, Mumbai-based Suhas Mishra is looking for a home loan of Rs 50 lakh to buy a flat worth Rs 60 lakh. If he takes a housing loan of Rs 50 lakh at 8.50% interest, he would have to pay an EMI of Rs 43,391. Over 20 years, Mishra would be paying Rs 54,13,878 as interest. 

A 25 basis points increase in the interest rate would increase the EMI to Rs 44,185 and the total interest paid to Rs 56,04,529. A 50 basis points rate hike, on the other hand, would increase the EMI to Rs 44,986 and the total interest payable to Rs 57,96,712. That’s Rs 1,90,651 more in case of a 25 basis points rate increase and Rs 3,82,834 more in case of a 50 basis points rate hike.