HDFC hikes retail prime lending rate: Five key questions answered

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Housing Development Finance Corporation (HDFC), the country’s largest mortgage lender, on May 1 raised the Retail Prime Lending Rate (RPLR) on home loans by five basis points, irrespective of the loan amount. One basis point is one-hundredth of a percentage point.

This means HDFC’s floating-rate home loans for customers with a credit score of over 750 will now carry an interest rate of 6.75 percent, up from 6.70 percent earlier.

The move comes after a clutch of banks, including State Bank of India, Axis Bank and Bank of Bank of Baroda, increased their marginal cost of fund-based lending rate (MCLR), in anticipation of a repo rate hike by the Reserve Bank of India as early as June.

Borrowers taking home loans are bracing for higher interest rates in the coming months amid inflationary pressures.

What is the RPLR?

RPLR is the rate at which housing finance companies lend to their most creditworthy customers. It determines most of the interest rates charged by lenders and is the benchmark on which housing financiers price their loans to customers. RPLR is derived from the average cost of funds for the lender. The rate includes the historical cost of the bank in raising deposits, the cost of the cash reserve ratio and statutory liquidity ratio, maintenance and the operating and other costs that lenders incur. Currently, housing finance companies in India lend at RPLR. Most banks peg their loans to MCLR and external benchmarks.

In the case of HDFC, the RPLR is also the rate at which its Adjustable-Rate Home Loans (ARHL) are benchmarked. ARHLs are also known as floating or variable rate loans. Any increase in HDFC’s RPLR will lead to a similar hike in home loan rates.

How do housing financiers derive the home loan rate from RPLR?

Since the RPLR is the benchmark at which their most creditworthy borrowers are given loans, housing financiers charge a spread over the rate for other customers. This spread is to compensate the bank for taking a higher credit risk. The final lending rate would include the credit risk spread and the tenure premium.

Policy rate changes trickle down to the RPLR and to the loan market. The discretion of passing on policy rate hikes or cuts depends on the housing finance company and its borrowing costs.

How does an RPLR hike impact borrowers?

An increase in RPLR would increase the interest burden on the borrower. In other words the number of equated monthly instalments (EMIs) may increase as the tenure of the loan increases or the EMIs may increase.

For example, for a 15-year home loan of Rs 1 crore, a 5 basis point hike in RPLR would increase the borrower’s EMI by Rs 400 every month.

Does the RPLR hike impact new borrowers?

The interest rate change will be effective only for existing customers. There will be no change in the interest rate for new customers.

How can borrowers reduce their home loan interest rate?

Existing borrowers can reduce their interest burden by reducing the tenure of their loans. Note that the interest rate charged on the loan consists of a tenure premium too. Even though a longer tenure may entail a smaller EMI, the interest burden increases due to a bigger repayment timeline.

Borrowers could also try to make prepayments from time to time. Prepaying a part of the loan reduces the amount on which interest would be charged. Most lenders have a daily-reducing balance policy in which the loan amount is reduced on the same day as the prepayment.