Repo rate hike to hit existing home loan borrowers harder
The RBI increased repo rate by 90 basis points (100bps = 1 percentage point) in two tranches – in May by 40bps and in June by 50bps. Many banks have also increased their rates on similar lines.
Repo rate is the rate at which the central bank lends money to banks. For existing borrowers, home loan rates will increase equal to increase in repo rate as their rates are directly linked with it. But new buyers borrow at rates fixed by banks, adjusting for hike in repo rate. Increase in new home loan rates are lower than total increase in repo rates.
SBI increased its rate for the best of the customers from 6.65% per annum in April to 7.55% before the latest hike in repo rate by 50BPS on Friday. Similarly, other banks also increased rates proportional to hike in policy rates.
But, many banks absorb parts of the cost associated with increase in policy rates due to competition. The cost of funds for banks is dependent on deposit rates. But, most banks have not increased deposit rates to keep pace with increase in repo rate.
According to RBI data, interest rates on term deposits of more than one year were between 5% and 5.6% in April 2022, which increased to between 5% and 5.75% in July, during which the RBI increased repo rates by 90bps. Many banks did not increase lending rates to match increase in policy rates due to this reason. Instead, banks like Indian Overseas Bank increased its home loan rate to 7.05%, Central Bank of India to 7.2%, Bank of India and Bank of Maharashtra to 7.3% by July 2022 from around 6.6% in April 2022.
As the home loan rate for existing borrowers had already increased by 0.9 percentage points before Friday’s increase of 50bps, their EMI has risen by 11% from April. If the repo rate further increases, as expected, by another 50bps in the September review, the total increase in EMI for existing borrowers would be 15.5%, which is high for already financially overstretched homebuyers.
Industry players say the hike will affect the real estate sector badly. As home loan borrowing is at flexible rates, a short-term interest rate spike will hurt homebuyers’ sentiments, said Niranjan Hiranandani, MD, Hiranandani Group.