Home loan interest rates are once again in the spotlight due to rising repo rates, which some industry experts believe could pave the way for rate hikes in the coming days. Some banks like ICICI Bank and Bank of Baroda have already raised the interest rates for home loans linked to the repo rate after the RBI announcement.
What should borrowers do?
Most banks use the repo rate as an external benchmark, a rise in the repo rate will almost certainly lead to higher interest rates on loans. Banks must adjust their lending interest rates based on an external benchmark at least once every three months to keep them in line with the external benchmark to which they are linked.
More banks are likely to announce rate hikes soon. The 40 basis point hike in the repo rate will lead to a higher cost of borrowing for existing and new borrowers. The impact would be quickest on those considering taking home loans or any other loans linked to external benchmark rates, especially the repo rate.
Interest rates for existing borrowers tied to the repo rate or any other benchmark interest rate, both internal and external, will remain the same until their next loan reset date. The new interest rate on their reset date will be calculated after taking into account the applicable reference rate on the reset date and credit spreads. This new interest rate will then remain in effect until their next loan reset dates, regardless of any changes to the repo rate by the RBI in the meantime. The reduction in the repo rate would have no impact on loans granted at fixed interest rates.