Look forward to higher EMIs in 2011

Home loan borrowers will have to pay higher equated monthly instalments (EMIs) in 2011. Most leading banks and housing finance companies (HFCs), including ICICI, Housing Development Finance Corporation, Bank of Baroda and Punjab National Bank, have increased their base rates by 20-50 basis points in December. These new rates will come into effect from January.

Suppose your interest rate moved up by 50 basis points from 9 to 9.5 per cent, it will translate into an increase of Rs 40 per lakh every month. For a Rs 40-lakh loan for 15 years, it translates into Rs 1,600 every month. The impact is slightly lower at Rs 32 per lakh every month, if the loan is for 20 years (at the same rates).

 

The good news is that since banks have shifted from the Benchmark Prime Lending Rate (BPLR) to the base rate regime, it implies rate movements will be stickier on both sides, as there will no longer be a loan-specific prime lending rate. Instead, banks will need a single base rate for all loans. And, they cannot lend below the base rate.

Teaser rates, however, could be passé. While the country’s largest bank — State Bank of India (SBI) — is yet to announce its decision to continue with its ‘special home loan scheme’ after December 31, most banks and HFCs have already discontinued it. SBI was offering a fixed rate of eight per cent in the first year, and nine per cent in the second and the third year.