No impact on home loan interest rates for now, as RBI leaves repo rate unchanged

The Monetary Policy Committee (MPC) of the central bank has a taken pause on hiking the repo rate since April 2023.

Your home loan EMIs (Equated Monthly Installments) will remain unchanged for now, with the Reserve Bank of India (RBI) deciding not to tinker with the repo rate for the fifth time in a row.

RBI Governor Shaktikanta Das on December 8 announced the Monetary Policy Committee’s (MPC) decision to leave the repo rate unchanged at 6.5 percent.

Today’s announcement to maintain the pause on the key rates will provide continued relief to borrowers, especially with regards to managing debt and household expenses.

“The RBI's decision to keep the policy rates unchanged is expected to have a stabilizing effect on EMIs for home and consumer loans. Borrowers have adjusted to the relatively increased interest rates compared to the historic lows of 2021,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution Pvt Ltd.

Currently, leading banks and mortgage companies such as the State Bank of India (SBI), Bank of Baroda and HDFC Bank are offering home loan rates starting at 8.4-9.05 percent.

Since October 1, 2019, many banks have linked the interest rates on floating-rate retail loans, including home loans, to an external benchmark, often the repo rate set by the RBI . As a result, changes in the repo rate directly influence the interest rates on these loans, impacting the EMIs for borrowers.

Past rate hike impact on borrowers

It is important to understand that a 250 bps repo rate hike i.e., from May 2022 to February 2023 implies that the debt burdens of home loan borrowers ballooned, as EMIs increased and loan tenures extended, sometimes well beyond retirement age.

The BankBazaar Aspiration Index, an annual study that studies key aspirations of people, year-on-year, revealed that more than half of the survey’s respondents saw their interest rates rise by 1-3 percent and their EMIs go up by approximately Rs 2,000 to Rs 10,000. On average, borrowers who started their loans with an average interest rate of 7 percent have seen it go up to 9.5 percent following the rate hikes. EMIs, too, have gone up by Rs.158 per lakh, from Rs.775 to Rs.932 per lakh.

"To combat the pressure of the rate hikes, existing borrowers can explore switching to lower home loan rates and continue to prepay a part of the loan to reduce the burden," says Adhil Shetty, CEO, BankBazaar.com.

Prepay your home loan

You could consider making part-prepayment of the loan out of your savings and investments rather than increasing EMIs. Just an extra few thousand every month can reduce your interest payout over the long term.

A good strategy is to earmark a portion of your annual bonus to prepay your housing loan every year.

Switch the lender

There are opportunities to switch the lender in the current scenario with on-going offers from the bank.

Given the high interest scenario, your best option in such a case is to refinance at a lower rate and retain a higher EMI. This will help you keep down the costs of borrowing.

What should new home loan borrowers do?

In case you are planning to avail a home loan do not take a decision based on the policy rate changes. As home loans are typically long-term loans, a home loan borrower would witness several changes in the interest rate cycle during his or her loan tenure.

Depositors: Maximise returns through laddering strategy

Fixed deposits have also witnessed greater interest following the rate hikes. "Customers can lock in their money in FDs of shorter tenures offering higher returns," says Shetty. He adds, to maximise returns, they can also explore strategies such as laddering.