As home loans turn tight, tenures set to get longer

Get set for a hike in your home loan monthly instalments by around 16.0%.

india Updated: Jul 27, 2011 02:22 IST
HT Correspondent
HT Correspondent
Hindustan Times

Get set for a hike in your home loan monthly instalments by around 16.0%.

With RBI governor D Subbarao raising rates to tame inflation, existing home loan customers must prepare for another round of rate increase as banks ready themselves to pass on the rate hike to customers.

The 50 basis point or 0.5 percentage point increase in the repo rate by the RBI on Tuesday makes it the 11th such hike in 16 months. The repo rate has moved up from 4.75% in March 2010 to 8.0% now.

While new customers may think twice before taking a loan, there is no respite for home loan customers already stuck with variable rates.

For example, a 20-year home loan that was available for 8.75% interest in March 2010 will now be available at around 11.0% for new customers.

However, for a variable home loan customer, the loan taken by a 30-year old in March 2010 at an interest of 8.75%, will have different implications. If it hits 11.0% now, it leads to a situation where the interest component of the loan will exceed the current EMI (equated montly instalment) paid and thus the loan's tenure will turn to perpetuity. If the tenure is to be restored to its original 20 years, the bank will raise the EMI by 16.0%.

While Yes Bank has already announced a 50 basis point increase in base rate and prime lending rate (PLR), others are likely to follow soon.

“The rate hike will have to be passed on to customers,” said Pratip Chaudhuri, chairman, State Bank of India.

“Interest rates will go up, very quickly,” said Aditya Puri, MD, HDFC Bank.

First Published: Jul 26, 2011 20:55 IST