BE PREPARED FOR AN INCREASE IN EMI

Change in interest rates, especially lending rates, is a cause of concern for borrowers when they go up. Banks have started to slowly increase their marginal cost of funds-based lending rate (MCLR) by 5-10 basis points, which has a direct impact on EMIs. The RBI in its April 8 monetary policy review signalled a shift in focus from reviving growth to reining in inflation. Ever since, the yield on the benchmark 10-year government securities has been above 7 per cent.

MCLR was introduced in 2016 and arrived at based on the marginal cost for funds, especially by the deposit rate and by the repo rate. It is an internal benchmark that determines the interest rate on loans based on CRR (cash reserve ratio), loan tenure and the operating costs. Hence, any change in repo rate changes the MCLR, impacting all categories of borrowers.

So, a 10 bps increase in MCLR of 7.35% for a 20-year home loan can increase the EMI by Rs 8 per lakh. On a Rs 50 lakh home loan, it will work out to an additional Rs 400 each month for the remaining repayment period. With more hikes expected this year, each spike can offset the best laid repayment plans. Borrowers have the choice to increase EMIs or increase the loan tenure to maintain the same EMI. If possible, pay the higher EMI and not the tenure because doing so will increase the overall borrowing cost. However, if increasing EMIs is a burden; opt for increasing the loan tenure and look for ways to repay lump sum from time to time to reduce the principal component of the loan.