The central bank on Tuesday increased its repo rate from 6.75% to 7.25% and reverse repo from 5.75% to 6.25%. While repo is the rate at which RBI lends to banks, reverse repo is the rate at which RBI borrows from banks.
In effect, for a home loan borrower, a 50 bps increase in interest rates would result in the monthly instalment on a 20-year loan going up by Rs 34 for every lakh. Similarly, for a five-year auto loan, the increase would be around Rs 25 per lakh.
For savings bank account holders, however, there could be some cheer as the RBI simultaneously increased interest rates on savings deposits from 3.5% to 4%, the first such move in eight years.
Banks across the board said they would pass on the increase in cost of funds to their customers.
RBI's rate hike will have an immediate impact on the outgo for your home and auto loans. However, existing auto loan consumers won't be affected as the squeeze will only be felt by fresh loan seekers.
"Auto loans are fixed rate loans so the existing loans will not be affected by the rate hike," an industry official said. Auto finance and mortgage lenders have more or less taken a call that they will pass on the hike to customers.
On the home loan front, the EMI on a Rs 20 lakh loan spread over 20 years, will go up by Rs 676 as the interest rate creeps up from 10.5% to 11%. But over 20 years, that hike works out to an extra amount of Rs 1.62 lakh. For a Rs 4 lakh auto loan spread over three years, the slab will go up from 13% to 13.5% or Rs 100 per month. In 36 months, that will total Rs 3,600 or just under 1% of the loan amount.
If you were planning to buy a car, you can hold on or make a cash purchase if possible. For a home loan holder, the best option is to pre-pay the loan. If you do not have money to close the loan account, at least try to pay back a part. "This will reduce your burden as you will have to pay the revised interest rate on the outstanding amount only," said Kartik Javeri,director, Transcend Consulting.
The trouble is that banks usually charge a 2% penalty on a pre-closure, though not if you are paying back with your own funds. But even a penalty is cheaper than a higher rate spread out over 20 years. Also, when interest rates go up, it is always better to go for a higher EMI than increasing the tenure.
FMPs best bet
The flurry of rate hikes in the past one year has turned investments in fixed income category into a rewarding option. But the latest rate hike is expected to bring pre-tax returns from the category, especially the hugely popular fixed maturity plans (FMPs), close to double digits.
Certificate of deposit (CD) rates for one year, which are now at 9.7-9.8%, are headed north and would settle above 10%, say experts. CD rates —the rates at which banks borrow from the market—would rise by at least 0.25%. This would mean higher returns for FMPs, which now offer pre-tax gains of 9.5% for a little more than a year and have bank CDs as underlying investment. "FMPs always do well in a rising interest rate environment," says Lakshmi Iyer of Kotak Mahindra Mutual Fund.
"Investors should take advantage of the high interest ra tes and increase their allocation to debt funds," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. But they should stick to short-term fu nds as longer-duration securities wo u ld slip if interest ra tes soften after a few months.
Source http://timesofindia.indiatimes.com/
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