What to pay attention to in your loans

With the general rise in interest rates in the financial system, borrowers will have to pay higher equivalent monthly payments (EMI) for loans taken out to buy homes, vehicles and other durable consumer goods. Therefore, they may need to rework their strategies to stay in control of their finances.

How is the hike so far?

The RBI had cut interest rates from 5.15% in February 2020, when Covid-19 hit, to 4% in May 2020. Interest rates on home loans had fallen to 6.50% from around 10%. , encouraging buyers to take out loans. Since May this year, interest rates have started to rise again, with Repo rates rising by 190 basis points to 5.90% as the RBI struggles to bring inflation down. Rising Repo rates mean that the cost of funds for banks and housing finance companies is also rising, causing the rise to be passed on to customers.

Residential unit sales more than doubled in the first half of 2022 compared to the same period last year, and the growth trajectory continued in the July-September quarter. With last week’s repo rate hike, home loan EMIs would rise an average of 8-9% from six months ago. Ditto for car loans and other personal loans.

The continued rise in EMI home loans should therefore act as a sentiment disruptor. “We believe that home loan interest rates reaching 9% and above could lead to a moderation in home sales growth over the medium term, particularly after the current holiday season,” said Samantak Das, economist in Head and Head of Research and REIS, JLL. India.

Will rates go up further?

The RBI raised the Repo rate by 50 basis points to 5.90 in the latest monetary policy review as the Monetary Policy Committee (MPC) sought to ensure inflation remained within target, while supporting growth. The high interest rate regime is expected to last for two to three years or until the level of inflation drops and the central bank lowers the Repo rate.

While the central bank maintained its CPI inflation projection at 6.7% for FY23, it lowered real GDP growth projections for FY23 to 7% from 7.2% and for fiscal year 24 to 6.5%. CPI is expected to remain above 6% for the first three quarters of FY23.

“Strong imported inflationary pressures remain an upside risk to the future path of inflation, amplified by the continued appreciation of the US dollar. We think a 35 basis point rate hike in December looks imminent, but beyond December it would be almost over,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

This indicates that EMIs or loan terms may increase further.

What is the impact of rising rates on your loan and your savings?

Home loan rates have risen nearly 200 basis points over the past five months. Higher EMI and longer loan terms along with inflation have led to increased spending and reduced personal savings.

While the RBI has raised repo rates by 190 basis points, many home loan customers have seen banks and housing finance companies raise rates by around 190 basis points. The impact: If the interest rate on an outstanding Rs 50 lakh loan for the remaining term of 15 years (180 months) increased by 190 basis points from 7% to 8.9%, the term of the loan would increase to 236 months (if the EMI is held constant). However, if someone wants to keep the occupancy time constant or is unable to increase the occupancy time due to an age limit or any other factor, the EMI would increase from Rs 44,941 to Rs 50,416, i.e. a monthly increase of Rs 5,474.

What can we do ?

Here are a few things one can do to keep the financial impact under control.

Get your loan appraised: The most common mistake individuals make is that they ignore their loan schedule assessment – if the bank/HFC has not increased the EMI but only increased the term. While individuals continue to read that rates have gone up and banks and HFCs have revised rates, few make the effort to check how much their loan term has increased. It is important to monitor the loan in order to be able to address the problem.

Can break the fixed deposit and partially repay your loan: It is important to evaluate the investments. If you have a fixed deposit that earns 5-6%, the after-tax return is limited to 3.4%-4.1% (for an individual in the highest tax bracket). Individuals can use part of this fixed deposit to prepay part of the loan and monitor their tenure and EMI. There is no point in earning 4% of a savings instrument if there is an outstanding loan on which one is paying around 9%.

Increase your EMI in part: If increasing the hold time makes you anxious, go for a partial increase in EMI. So, in the example above, as the rise in interest rates leads to an increase in tenure from 180 months to 236 months, if the individual asks his bank/HFC to increase the EMI by Rs 2,500 to Rs 47,441, seniority would amount to 206 months. For those who can afford it, it makes sense to increase the EMI and limit the impact of interest volatility on their loan maturity.

Big leap in personal loans

Personal loans from banks jumped 19.5% to Rs 36.47 lakh crore in August 2022 from Rs 30.51 lakh crore a year ago. Home loans, the largest component of personal loans, rose by 16.4% to Rs 17.85 lakh crore from Rs 15.34 lakh crore as borrowers took advantage of the low interest rate regime. Credit cards outstanding also jumped by 27.3% to Rs 1.67 lakh crore from Rs 1.31 lakh crore.

Comments are closed.