Here is how much your EMI will go up after the recent repo rate hike

• In the last two years, interest rates on loans have gone up by 1.9% – undoing the EMI mathematics of most borrowers.
  
• Most experts predict that there are more rate hikes coming as early as December.
  
• For auto and home loans, borrowers can consider extending their tenures if the burden is higher.
  

Be prepared to pay more interest if you want to borrow to buy a home or a car. The era of low interest rates has formally ended, with the Reserve Bank of India kicking off its rate hike cycle in May.

The repo rate or the rate at which central banks lend to banks has risen by 1.9% after four consecutive hikes. That means EMIs will only go up making it costlier for borrowers. While existing borrowers of home loans may see their tenures go up, equated monthly installments (EMIs) of personal loans and auto loans will rise further after today’s 50 basis point rate hike.

"The Reserve Bank of India has hiked the repo rate by 50 basis points. This marks the fourth consecutive rise in the repo rate, bringing it to 5.9%. This will definitely impact the new and existing borrowers. However, this decision has been made to curb the rising inflation. With India’s inflation rate being 7%, the value of the currency might fall without the intervention of the RBI in order to try and sustain it and bring it down," said HP Singh, chairman & managing director of Satin Creditcare Network.

Home loans

Let’s look at home loans first. If you have ₹50 lakh outstanding with a bank at an 8.5% interest rate spread across 20 years, the effective EMI you have is at ₹43,391. However, if the 50 basis point hike is passed on to the loan, the EMI will go up to ₹44,986 – an effective increase of ₹595 per month.

For every one lakh of home loan for this tenure, the EMI will go up by ₹32.

Auto loans

The net impact is different for auto loans where the tenures are shorter but interest rates are different. For example if you have a ₹10 lakh auto loan at around 8.6% interest rate for a tenure of seven years, your EMI has been at ₹15,887. Again, in the changed interest rate regime, it would come up to ₹16,140 every month – an effective increase of ₹253.

For every lakh of an auto loan for the said tenure, the EMI will go up by ₹25.

Personal loans

For a personal loan that’s spread across two years, the EMI for a ₹3 lakh loan at 11.4% would be at ₹14,038. After an interest rate reset, it would go up to ₹14,108 — an effective increase of ₹70.

Increasing loan tenure?

In the last two years, interest rates on loans have gone up by 1.9% – undoing the EMI mathematics of most borrowers. For auto and home loans, borrowers can consider extending their tenures if the burden is higher.

However, it is to be noted that extending tenures will increase the interest payable across the years — and especially for large loans like home loans, the net payable will balloon correspondingly.

The other factors that play a role in tenure extension would be the borrower’s age – while younger borrowers can afford it, most people must clear off long term loans before retirement age of 60.

More hikes ahead?

When he announced the rate hikes today, RBI governor Shaktikanta Das said that the consumer price inflation is still above the central bank’s tolerance level.

“Going forward, the RBI will remain vigilant, agile and nimble in its liquidity management operations and would use all instruments at its disposal to mitigate the spillovers of global financial market volatility on domestic financial markets,” said Das.

It means going ahead, there could be more rate hikes on the horizon and a lot of experts predict that too. “We continue to expect another 35 bps hike in December followed by a pause with the RBI assessing Fed actions, and impact of past rate hikes on domestic growth and inflation,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

Those who have banked on low interest rates offered during the pandemic to take home loans, might have to adjust their monthly math — but the burden of growing interest is what most people across the world have been dealing with and partial prepayments will help if it can be afforded.

Since more rate hikes might be coming, it would be a good idea to pay off personal loans if possible as they can get costlier.

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