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The Reserve Bank of India has increased the rate of interest for housing loan recently. RBI has increased the short-term lending rate from 6.5% to 6.75% and the short-term borrowing rate 5.5% to 5.75%. The Central Bank has not changed the Cash Reverse Ratio(CRR) keeping the liquidity situation in mind. CRR is the amount banks are required to keep with the RBI in cash. The CRR is currently 6%.
In order to tackle inflation, the RBI has increased the interest rates for the eighth time in the last 12 months. Inflation is still above 8%.
Change in EMI and Loan Tenure:
In some banks, if there is an increase in the rate of interest, there will be no change in the EMI. Instead the banks increase the tenure of the loan. And so, the loan tenure may extend for 1 or 2 years more. An increase in the rate of interest means that the floating rate borrowers have to pay an additional cost. The banks may also increase the EMI in order to reflect the increased cost. There will not be any such impact for fixed interest rate borrowers. This is because there will be no change in the interest rate for fixed interest rate borrowers during the fixed period.
Impact on Loan Eligibility:
The borrower’s ability to repay the loan on time is the most important parameter used for calculating the eligibility of the borrower. The banks compare the EMIs with the disposable income of the borrower in order to calculate the eligibility. Disposable income is the amount left with the borrower after meeting the monthly expenses that can be used to repay the loan.
While checking the borrower’s eligibility for housing loan, the banks make sure that the borrower has adequate cash left in order to meet his monthly expenses. And so, the increase in interest rate can have an impact on the borrower’s eligibility. The loan tenure has to be extended if the EMIs are kept low. This will increase the interest cost for the borrower and also the risk of the lender. On the other hand, if there is an increase in the EMI, there is a risk of default by the borrower.
Therefore, the bank calculates the amount available for EMI from a given income in order to determine the eligible loan amount. If there is any change in the loan amount, rate of interest, loan tenure or the method of computing interest, there will also be a change in the EMI. If there is an increase in the interest rate and the other variables are constant, the eligible loan amount will decrease. If there is a decrease in the rate of interest, the loan eligibility will increase.
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