RBI Repo Rate Hike: The Reserve Bank’s Monetary Policy Committee (MPC) is going to announce its new policy on October 7 at 10 am. After this important meeting, RBI Governor Sanjay Malhotra will hold a press conference and share information about the decisions taken. Market experts estimate that this time the central bank may increase the repo rate by 25 to 50 basis points ie from 0.25% to 0.50%. If this happens, it will affect the common people who have taken loans on floating interest rates.

What will change as repo rate increases?

The repo rate is actually the interest rate at which the Reserve Bank lends to other commercial banks. When the RBI increases the repo rate, the cost of raising funds for banks increases. Instead of bearing the burden of these increased costs themselves, banks pass it on to their customers. A direct result of this is that all loans like home loans, car loans and personal loans start getting expensive.

If your loan is on a floating rate, the change in interest rate will be reflected in your monthly installments. Suppose you take a home loan at 8.5% for 20 years. Now due to increase in repo rate, bank interest rate increases from 0.50% to 9%. In such a situation, the burden on your pocket can be easily understood from the different loan amount.

Complete account of home loan between 10 to 50 lakhs

The larger the loan amount, the greater the impact of even a small change in the interest rate.

1. 10 lakh loan: 8.5% for 20 years with monthly installments of Rs. 8,678 occurs. Once 9% interest is earned, it will increase to Rs 8,997. That means you have to pay Rs 319 more per month and around Rs 3,828 more per year.
2. Loan of Rs 20 Lakh: EMI on this amount at 8.5% comes to around Rs 17,356. If the interest is 9%, it will be Rs 17,995. That means every month Rs. 638 and in the year Rs. 7,656 additional burden.
3. 30 lakh loan: Current Installment at 8.5% Rs. 26,035, which at 9% is Rs. 26,992 will reach. In this, you will have to pay Rs 957 more per month and Rs 11,484 more in a year.
4. Loan of Rs 40 Lakh: The EMI on a loan of Rs 40 Lakh will increase from Rs 34,713 to Rs 35,989. From this every month Rs. 1,276 would make a difference, which in a year would be Rs. 15,312 occurs.
5. 50 lakh rupees loan: The installment of this big loan at the rate of 8.5% is Rs 43,391. As soon as the interest becomes 9%, the installment will be Rs 44,986. That means Rs 1,595 more will be deducted per month, resulting in an additional cost of around Rs 19,140 in a year.

How Much Impact on Personal Loan Installment?

Personal loans already fall under the category of unsecured loans and their interest rates are much higher than home loans. If a customer has taken a personal loan of Rs 5 lakh for 5 years at 12% interest rate, his current installment comes to around Rs 11,122.

After the repo rate hike, if the personal loan rate rises from 0.50% to 12.5%, the new loan EMI will increase to Rs 11,249. In this way, an additional 127 rupees will have to be paid every month. Although this amount may not seem huge, but if a personal loan is being taken along with the home loan, then the monthly budget will definitely fluctuate.

EMI or tenure loan, which is better to choose?

When the interest rate increases, not only the monthly installments necessarily increase. Banks generally offer two options to customers. The first option is that your monthly installment remains the same, but the total loan repayment term increases. Another option is that the tenure remains the same and the EMI amount deducted every month increases. In some cases, banks also adopt a mix of both.

If you don’t increase the EMI, your loan may drag on for several months or years. While increasing the EMI every month will put some pressure on your pocket immediately, in the long run you will avoid paying more interest. It is also important to keep in mind that an increase in the repo rate does not mean that every bank will immediately increase your interest rate by the same amount. This also depends on your loan benchmark, bank spreads and reset cycle rules. In such a situation, if you have a floating rate loan, it is very important to keep an eye on the next message from the bank.