Rate hike: Be ready for costlier loans

The decision of the Reserve Bank of India (RBI) to increase key lending rates for the 11th time since March 2010 will only burn a bigger hole in your pockets, as home, automobile and education loans are set to become costlier.

Home buyers who borrowed three to four years are likely to be hurt the most.

For one, since the interest payment is the major chunk in the initial years, consecutive increases would have led to an increase in their equated monthly instalments (EMIs) or tenures at a very fast pace.

The apex bank's 50-basis-point increase on Tuesday was preceded by 10 other increases in the last year.

Both repo and reverse repo rates have been raised 325 basis points and 375 basis points, respectively, in the past year.

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As a result, banks have been increasing home/auto loan rates.

For instance, if one had taken a housing loan four or five years back (2006-07), one would have got it at 8-9 per cent. But, if one is to take a loan today, one would most likely have to repay at 14 per cent, or even more.

After the latest rate increase, banks are already talking about passing the entire burden on to the customer.

In the post-policy reaction, bankers confirmed that the rate increase would be passed on to customers.

HDFC Bank managing director Aditya Puri said: "Interest rates will go up very quickly."

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However, those who had taken teaser loans (or fixed-cum-floating loans), made famous by SBI's special home-loan scheme launched in February 2009, would not be immediately affected by the rate increases, as they would be in their initial fixed-rate regime.

They will only feel the impact of higher rates in their second or third year, depending on the bank or housing finance company.

Those who got their loans sanctioned about six to eight months before and are still waiting for disbursal would have already seen a 100-basis-point increase in rates.

In such cases, banks would either raise your EMIs or extend your loan tenure, without affecting the instalment.

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Of course the quantum of rate increase is still not clear.

"We are examining if the rates need to be raised 50 bps," said Bank of Baroda CMD M D Mallya.

Within an hour of RBI's action, YES Bank raised its base and prime lending rate (PLR) by 50 basis points, each.

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For first-time home buyers, delaying the decision may not make much sense because even if they are paying higher rates now, they will get the benefit of falling rates in the coming years.

Since the fall in rates may not happen in the immediate future, senior bankers say there is no point waiting for rates to fall either.

Financial planners agree that property purchases should not depend on the loan rates.

Reason: Housing loans are long-term loans available at floating rate of interest.

Interest payouts will go down as the rate cycle reverses. Not to forget the tax benefits you get on home loans.

For someone who is purchasing a second home or planning to invest in property through a bank loan, there will be ample opportunity in the future.

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What will also hurt home buyers is the inflation rate.

With food inflation at 7.58 per cent (for the week ended July 9), house expenses are already on the boil.

The advice, therefore, is to wait for the expenditure burden to come down before jumping to make big investments in a second property or car.

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In case of education loans, though the decision may not depend on loan rates, you need to be ready for a higher interest outgo.

This is so because repayment starts after a moratorium of one-two years and interest rates may have gone down a bit by then.

Financial planner Arnav Pandya says: "Your decision to buy a car can be deferred, since it is not an income-generating asset.

And, since these are fixed interest loans, you will get locked in close to the peak and there is no tax benefit either."

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But, the other side to it is that auto prices are dropping and car finance companies are luring buyers with much lower loan rates.

For instance, Volkswagen is offering a special rate of 6.99 per cent on the Polo.

But maintaining that when the petrol prices are over Rs 60 a litre should also be taken into account.

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The silver lining: Deposit rates will have to go up. At present, SBI is offering 9.25 per cent for a loan between one and ten years.

Others, like PNB and Bank of India, are offering 9 per cent for loans of between one and three years.

These banks also have special deposits for 555 and 1,000 days that offer 9.25 per cent each.

Since the interest rates are near peak, investment experts reiterate you park your money at these levels.