Banks hike lending rates,home loans to cost more,EMI to go up

Some of India’s leading banks – including SBI, ICICI Bank & PNB – have announced an upward revision in their marginal cost of funds-based lending rates (MCLR). This means that all types of loans – ranging from personal to car to home loans – are going to cost more soon.

For instance, the State Bank of India, India’s largest bank, has increased its MCLR by up to 25 basis points (bps) with effect from March 1, 2018. While its one-year MCLR now stands at 8.15% as against 7.95% earlier, the two-year MCLR has been increased from 8.05% to 8.25%, and the three-year MCLR stands at 8.35% as against 8.10% earlier. Similarly, ICICI Bank has raised its one-year MCLR to 8.30% from 8.20% earlier, while PNB has raised its one and three-year MCLR rates to 8.30% and 8.45% from 8.15% and 8.30%, respectively, effective March 1, 2018. Now only this, some other banks are also likely to revise their MCLR in the days to come.

According to financial experts, home loans are usually pegged to one, two or three-year MCLR. Thus, with this upward revision in these rates, housing loans are set to cost more.

“Hiking of MCLR rates by SBI and some other banks is a confirmation of the reversal of long-term softening interest rate cycle. The writing has been on the wall for sometime and bond yields have been rising, but this is the first confirmation of the reversal in the interest rate cycle,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

Kapur, however, says that loan rates may not go up in a hurry as liquidity with banks is still high, competition amongst banks and NBFCs is getting tougher and while consumer credit demand is growing, the overall demand for industrial loans remains muted.

However, it is also true that the reversal in the interest rate cycle is bad news for borrowers, especially for those looking for a home loan and even for those who have already taken a housing loan as their EMIs will start going up. Here we are taking a look at how any increase in the home loan rate will effect your EMIs and the total outgo.

Suppose Mr Amar Verma is planning to buy a house of Rs 60 lakh, for which he needs a housing loan of Rs 50 lakh. The current rate of interest is hovering around 8.30%. If he takes a home loan of Rs 50 lakh at 8.30% interest, this would imply an EMI of Rs 42,760. Over 20 years, Mr Verma would be paying Rs 52,62,480 as interest. A 25 bps increase in the interest rate would increase the EMI to Rs 43,550 and the total interest paid to Rs 54,51,885. A 50 bps rate hike, on the other hand, would increase the EMI to Rs 44,345 and the total interest payable to Rs 56,42,843. That’s Rs 1,89,405 more in case of a 25 bps rate hike and Rs 3,80,363 more in case of a 50 bps rate increase.

Impact of Home Loan Rate Hike on EMI & Total Interest Payable:

Current rate-8.30%;New rate-8.55% /8.80%;Current EMI- 42,760; New EMI-43,550/44345; Difference(EMI)-790/1585;Current Interest-52,62,480;New Interest- 54,51,885 /56,42,843; Difference Interest- 1,89,405/3,80,363. This however at all. In a rising interest rate regime, banks and housing finance companies (HFCs) keep increasing their interest rates at the drop of a hat. So, expect these rates to go up more in the months and years to come and also be prepared to shell out more and more and more until some miracle happens and interest rates start falling again (although that too may be short-lived).

So, what to do? Sadly, you can’t do much about this. One way out may be to opt for a fixed rate home loan, but that again is a costly option as fixed rate home loans are usually priced 1 to 2.5% higher than the floating rate home loans. However, you can opt for one if you are able to get a good deal.

“For fresh loans one can say that fixed interest rate options should be better than floating rate ones,” says Kapur. However, that’s your choice! Also remember that all fixed rate home loans do not remain ‘fixed’ for their entire tenure. So, trade carefully. Ref. : http://www.financialexpress.com/money/home-loans-to-cost-more-as-banks-hike-lending-rates-heres-how-your-emis-will-go-up/1087637/ --- Dated:Mar'05,2018.